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How do the Credit Card Providers Calculate Minimum Amount Due?

Credit Cards are gaining more and more popularity in India. According to the Reserve Bank of India transactions worth Rs. 546.35 billion took place in India in the month of December 2019, and the total number of credit cards in use as on that date were 44.2 million.

Credit Cards come with a host of advantages like credit period, ease of use, discounts, and rewards. With such beneficial features, the popularity of Credit Cards is on the go. Despite all the positives, Credit Card usage comes with a lot of caveats. The chances of overspending and a constant watch on due payments on a timely basis are a few aspects which need to be taken care of. If the outstanding amounts are not paid timely, the Credit Card holder would be subject to late fees and high rates of interest.

What is the minimum due amount?

Minimum amount due is a minimal amount which the Credit Cardholder needs to pay to keep his card regularized and protect his Credit Score. Though it is best to pay off the Credit Card outstanding amount in full, there is also an option to pay the minimum due amount and yet protect one’s credibility.

Read about: Lower interest rates thanks to improvements in fintech

Calculation of minimum due amount

Most of the Credit Card providers in India provide the facility of payment of the minimum amount due, and the calculation logic followed may vary from bank to bank or one card to the other. The calculation generally suggests a percentage ranging from 3% to 5% on the total Credit Card outstanding amount as on the statement date. SBI Credit Cards charge an amount of 5% of the total outstanding amount as the minimum amount due. Most banks charge interest at the rate of 3% per month, which aggregates to approximately 36% per annum.

How do the Credit Card Providers Calculate Minimum Amount Due?

Let us understand the calculation of the minimum amount due to an illustration.

Assumptions made for this illustration are as follows:

  • Credit card statement is generated on 7th of every month.
  • Payment of outstanding amount has to be done by 28th of that month.
  • Minimum amount due applicable is 5% of the amount outstanding on statement date.
  • Late payment fees will be Rs. 600 plus applicable taxes.
  • Interest will be payable at the rate of 3% per month. Taxes will be applicable thereon.
 
Date of transation
Particulars of transaction
Amount
Remarks
Jan 24 ’19
Purchase from Spencers
50000
Purchase done. Credit period available.
Feb 7 ’19
Statement generated
50000
Payable by 28th Feb’19. Minimum amount due is Rs. 2500 (5%)
Feb 28 ’19
Payment done
2500
Only Minimum amount due paid
March 1 ’19
Purchase from Fab India
10000
Credit period will not be available
March 7 ’19
Interest 
2170
Calculation below
March 7 ’19
Tax on Interest
391
Calculation below
March 7’19
Statement generated
60061
Payable by 28th March’19. Minimum amount due is Rs. 3030 (5%)
March 28’19
Payment not made. Minimum due not paid as well. Late payment charges applicable.
March 31’19
Late payment fees
600
Charged within 3 to 5 days of the due date if the minimum amount is not paid.
March 31’19
Tax on late payment fees
108
Tax applicable on late fees
April 7’19
Interest 
1842
Calculation below
April 7’19
Tax on Interest
332
Calculation below
April 7’19
Statement generated
62943
Payable by 28th April’19. Minimum amount due is Rs. 3147 (5%)

 

The above illustration clearly shows how the minimum amount payable is calculated. Its payment results in the applicability of interest component only. However, late payment fees are attracted if the minimum due is not paid.

Interest payable for March statement (Figs in Rs.)
Interest on 50000 from Jan 24 to Feb 27
1726.02
Interest on 47500 from Feb 28 to March 7
374.79
Interest on 10000 from March 1 to March 7
69.04
Total
2169.85
Rounded off for convenience
2170
Tax applicable
390.6
Rounded off for convenience
391
Interest payable for March statement (Figs in Rs.)
Interest on 60061 from March 8 to April 7
1836.38
Interest on late payment fees from March 31 to April 7
5.58
Total interest
1841.96
Rounded off for convenience
1842
Tax applicable
331.56
Rounded off for convenience
332

Factors which can further contribute to increasing the minimum amount due

The minimum due amount may further be impacted by a few factors. These may be listed as follows.

  • Running equated monthly installments for purchases made in the past months.
  • Outstanding amounts running unpaid from previous months.
  • Delayed payment of the previous outstanding bills.
  • Actual usage exceeding the credit limit assigned.
  • Availing EMI balance transfer option.
  • The card is subject to a higher interest rate.
  • Changes in policies followed by Credit Card issuer.

Advantages of payment of the minimum due amount

This option has been devised to:

  • Enable Credit Cardholders to keep their Credit Cards regularized and active.
  • Save themselves from the burden of late payment charges
  • Protect their Credit Scores.
  • Ensure that the Credit Cardholder re-pays a part of the principle every month.

Disadvantages of payment of the minimum amount due

  • The interest-free credit period is not available for purchases made if the minimum amount due is paid in any of the months.
  • Additional charges on grounds of late payment fees plus taxes applicable thereon.
  • Additional interest charges imposed by the bank.
  • Suspension of the card if it crosses the defined credit limit.
  • Hit to the Credit Score and creditworthiness of the individual.
  • A habit to pay the minimum amount due can increase the outstanding amounts beyond one’s handling capabilities.

Also Read: Why your offline store should start accepting mobile payment?

When should one resort to payment of minimum dues?

The usage of this feature should be restricted to scenarios when individuals run short of funds exceptionally. It may be used for a couple of months but should not be extended longer because of the loss elements attached to it. It should be noted that making use of this feature should not become a regular practice.

How the minimum amount due is apportioned?

It is also to be noted in this regard that the minimum amount due which gets paid in the current month is not completely allocated to the reduction of outstanding amount against the Credit Card. A maximum portion of it is adjusted towards interest on the outstanding sum and a certain portion of it is allocated towards the original outstanding sum.

Let us consider a hypothetical example here. Suppose Mr. Anand made purchases to the tune of Rs. 10000 in the month of May’19. Due to the shortage of funds, he is unable to clear the bill amount which is due on the 6th of June’19. He, however, pays the minimum amount due of Rs. 500. It is be noted that the amount of Rs. 500 paid would be apportioned towards outstanding amount as well as interest payable.

Hence, in case there are no purchases in the month of June’19, the bill payable in July’19 would be Rs. 10000 – Rs. 300 = Rs. 9700 plus the interest and taxes payable. The remaining amount of Rs. 300 would get adjusted against interest.

| About the Guest Author:

Guest Author
Shadab Karim

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