Say ‘NO’ to Minimum Credit Card Payment

Consumers own at least two credit cards in Singapore. This plastic has become a necessity in our lives and a revenue generator for all financial organisations. Banks state that the minimum amount on a credit card is the lowest amount of money you need to pay every month against your credit card bill. As much as ‘minimum payment’ sounds tempting, do not be fooled. If you are under financial duress, you may think that paying just the minimum amount each month is a good option, but here’s what happens when you make this a habit:

[ photo: www.trak.in ]


1. You are only paying the interest
If you continue paying just the minimum amount, you are only paying the interest charged by the bank and not the principal balance. This way, your bill will keep growing every month and you will have a massive amount of credit card dues. In the long run, you will realise that you have paid more than your principal balance for several months or more. Therefore, it is always advisable to pay the bill in full every month. 

2.Profits for banks
Regardless of how your bank calculates the minimum amount, it is not designed to help you pay your credit card bill faster. Like every other business, banks want to maximise their profits by charging interest. The longer you take to pay off your balance, the more interest you pay on your primary balance.

3. Impacts your credit score
Paying just the monthly minimum amount has no direct impact on your credit score as you are paying on time. You will have a positive payment history which is good for your credit score. But, you should be aware of the indirect impact it has on your score. You may risk increasing your credit utilisation ratio, which should be under 30%. 

Credit utilisation is the ratio between your outstanding balance and your credit limit. For example, if your outstanding bill is S$800 and your available limit is S$2,000, your credit utilisation is at 40%. If you overshoot this ratio, then your insurer will report your high utilisation ratio to the credit bureaus.

4. Paying less than the minimum amount due
The most obvious consequence of paying less than the minimum amount due on your credit card is late payment fees. The issuer can also choose to report you to the credit bureaus, which will have a negative impact on your credit scores and credit reports. 

You are allowed to pay less than the minimum amount only if you and your credit card issuer have mutually agreed upon a separate payment plan. The issuer can also charge a penalty annual percentage rate (APR) on your future balances, which is as high as 29% to 30% p.a.

5. Continuous use of your credit card
It is not a good idea to keep using your credit card while paying only the minimum amount every month. Your credit card bill will keep increasing, consisting of your previous purchases, interest rates, and future purchases. Hence, you will end up crossing your credit limit and a surmounting credit card debt.

Tips: Pay a little more than the minimum amount 
Paying a tad bit more than the minimum amount is a good habit that you must adopt. This will help lower your compounded interest rate and help clear off debts. All you need to do is pay a fixed amount per month along with the lowest due amount. 

You can slowly increase this fixed amount to decrease your compounded interest rate. However, if your own multiple credit cards and use all of your monthly income to only pay credit card bills, then this habit may not be for you.

The words ‘minimum amount’ printed on your monthly bill are deceiving and offer a false sense of security. Paying just the minimum amount will not help you clearing off debts sooner. 

Never adopt this habit as a long-term strategy because the interest charged on your outstanding bill will only increase every month. In case you have a cash-crunch and are not able to pay the credit card bill in full, then you can consider the debt consolidation option to clear off debts. 

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