If you think that paying the ‘minimum amount due’ on your credit card bill every month will help you completely pay-off your credit card bill within few months, then you are on the wrong track.
Making the ‘minimum amount due’ payment on your credit card will reduce the outstanding balance of the current month but repeatedly making only minimum amount due payment will not lower your debt (outstanding amount).
Also, even if you have decided not to use your credit card further until you re-pay the full bill amount, your debt will not reduce; instead, it will keep on increasing.
Depending on the kind of credit card you have, you may be charged anywhere from 3 to 4 percent per month on your credit card outstanding at the end of the credit free period. On annualised basis, this would mean a rate of interest of 30 to 50 percent a year. Add the value of penalties for late payment, and your total additional charges could touch 50 to 60 percent a year. At such high rates of interest, it is obvious why your outstanding will not decrease much even after paying minimum due for years.
Let us take an example. If your credit card outstanding is Rs.100,000 and you decide to pay the minimum balance every month, in one month you will typically pay 5% of the outstanding amount, i.e. Rs.5000 but your actual outstanding at the end of one month will reduce by Rs.1,675 only as the balance will go toward payment of interest charges:
| Month | Amt Balance | MAD | Cum MAD |
| M1 | 1,00,000 | 5,000 | 5,000 |
| M2 | 98,325 | 4,916 | 9,916 |
If you continue to pay minimum amount due (popularly called MAD) for one year, you would have paid Rs.54,770 minimum amount due but your principal outstanding amount would have reduced to only Rs.83,043, which means reduction of only about Rs.17,000 and balance amount of around Rs.37,000 going towards interest charges.
| Month | Amt Balance | MAD | Cum MAD |
| M1 | 1,00,000 | 5,000 | 5,000 |
| M2 | 98,325 | 4,916 | 9,916 |
| M12 | 83,043 | 4,152 | 54,770 |
The reduction in principal outstanding amount is very marginal with passage of time. By the end of 2 years, you would have paid Rs.99,490 but your outstanding would still show Rs.67,806. Here is the calculation for 2 years:
| Month | Amt Balance | MAD | Cum MAD |
| M1 | 1,00,000 | 5,000 | 5,000 |
| M2 | 98,325 | 4,916 | 9,916 |
| M12 | 83,043 | 4,152 | 54,770 |
| M24 | 67, 806 | 3,390 | 99,490 |
It is evident that continuing to pay MAD (minimum amount due) is not the solution. If you have difficulty in paying off your credit card balances, an alternative solution is to go for settlement where in 1-2 years you are able to become debt free instead of getting into debt trap by paying minimum amount due every month.
Want to get out of the debt trap, explore credit card settlement. Register and talk to our counsellors for more information.
