When you pay just minimum amount for your credit card. It takes a lifetime to pay it completely
Whenever you use your credit card, you are given a grace period to pay the amount, i.e. upto 50 days. This 50 days is from the day of billing to next bill payment.
If we are not able to pay the amount in those 50 days , this is what happens with us.
To avoid late fees and the CIBIL score shall not be affected, banks have come up with a sugar coated plan for allowing the credit card users to pay 5% of the total amount as minimum amount and rest of the balance is carry forwarded with some interest on it.
Lately i understood that the amount doesn't reduce by the amount what i pay, it is still near the same amount.
I am jotting down what happens when we pay minimum amount due for credit card and carry over the balance money for next month.
How does it work ?
Consider you have used 1 lakh on your credit card and i am not able to pay by the due date.
Banks have come up with a sugar coated sword, which allows you not to pay full amount but only minimum amount of your total payment of credit card, so that late fees is not charged on the card and CIBIL score is not affected.
What is minimum amount due ?
It's 5% of the total bill amount, it allows the user to pay only 5% of the amount and the rest 95 % is carryforwarded to the next months bill cycle.
if your bill amount is 1,00,000 so 5,000 is your minimum amount
What happens with the remaining amount ?
after paying 5000, the remaining 95,000 is carry forwarded to next month.
How it is carry forwarded ?
As the grace period of 50 days is over, this 95,000 will not be carryforwarded like that only, bank would charge some interest on the same and allow you to pay the amount in the next month.
How much is the interest on the remaining amount ?
The interest on the remaining amount is depended on the value of the credit card that you use. Generally it is between 4% to 2%. Mind it, the interest cannot be more than minimum amount else the amount would never decrease.
How is the value of credit card decided ?
Based on your income, the limit of credit card is decided, and based on the limit the interest is decided.
If the limit is low, the interest rate would be high, if the limit is high, the interest rate would be low, generally on most credit card the interest would be 3% to 4%,plus GST on the interest as applicable.
If the basic points are clear, we can continue with the calculations.
If you have paid only minimum amount, how much interest is added to next month ?
the amount was 1,00,000 hence the minimum amount would be 5000
As you paid 5000 this month, 95000 is remaining to pay to the bank.
Consider 4% as interest.
4% on 95000 would become 3800
next month's carry forwarded amount becomes, 98,800
So you paid only 1200
For next month minimum amount would be 5% of 98,800 which is 4940.
If you only pay 4940 for second month. The balance remaining is 93860. As this amount is carry forwarded for 3rd month, 4% interest is applicable on it.
For the 3rd month you amount to pay will be 93,860 plus 4 % interest on it, which will be 4693 so total amount becomes 98,553.
Here we are seeing that the amount is decreasing
Lets check some facts.
The interest rate is 4%, but this is for a month only, so interest per annum becomes 48%, which is higher than any EMI.
Let's see the amount we paid :
1st month: 5000
2nd month: 4940
Which equals: 9940.
For the third month how much amount to be paid is remaining: 98,553 So you actually paid 1447 as principal and 8493 as interest to the bank.
I did some calculations on when the amount becomes 0 It took almost 600 months(50 years) still the amount was not 0
Lets see how much interest we paid ?
I did some calculations, approximately 3,00,000 was paid as interest and principal was 1,00,000 as usual. which is 3 times the value.
Which is like 75% , this is higher than any interest paid for personal loan etc etc.
Whenever we pay with minimum amount, what happens with the fresh purchase of that month.
The bank doesn't give grace period of upto 50days but it is made as 0, as we are already paying interest on the last months amount, and interest is charged on fresh purchase too.
How much is the interest on fresh purchase?
The interest percentage is same and it is on pro rata basis i.e. interest only for the number of days before the billing you did the purchase will be put upon the fresh purchase.
So, humble request, please do not fall into the trap of minimum amount. Convert to emi or take a personal loan is the amount is huge. In any emi your interest cannot be more than 15%
No banks will ever tell you how many month it takes to pay all amount, if only minimum amount is paid every month. Yes it is more than 50 years.
What advantage do we have over non payment in that month?
1: Your CIBIL score doesn't affect.
2: late fees is not charged.
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