If you only pay the minimum amount due on your credit card payment month after month, you will end up with a balance so high that you will find it extremely difficult to repay. Carrying a high credit card balance carries a number of risks from damage to your credit score to less access to your credit limit. Continue reading to know of the other harmful consequences of paying the minimum amount on a credit card…
What is a Minimum Amount Due?
Minimum amount due is the Lowest Credit Card payment amount you are must pay on or before the statement due date to maintain your credit card account. Generally in UAE, the minimum amount due is calculated as 5% of your outstanding Credit Card Account balance each month-end, It is a very small portion of the principal outstanding every billing cycle on the credit card statement date.
5 reasons why Credit card payment of the minimum amount due only is wrong
A credit card can at once be both a blessing and a curse. While it offers the convenience of cashless transactions, a cardholder must also bear the responsibility of using the piece of plastic in a careful and thrifty manner. With a credit card in hand, many consumers are tempted to spend more than they can pay off. Meanwhile, there are others who frequently max out their cards without realizing the negative effects of such actions. Here’s what can happen if you get into the habit of only paying a minimum amount on your credit card:
Harms your credit score
A maxed-out credit card (when your balance is right at the credit limit) is harmful to your credit score, which is the three-digit number that gauges your creditworthiness. Experts say that a high credit card balance could cause your credit score to drop more than 100 points, depending on the other information in your credit report. When the ratio of your credit card balance to the credit limit, i.e. your credit utilization, gets too high, your credit score suffers. It goes without saying, the higher your balance, the more your credit score suffers which means keeping a low balance is better for your credit score.
Increase in charges
Each month you do not pay your balance in full, you’ll be charged interest in the form of a finance charge. These monthly finance charges are calculated based on your credit card balance and your interest rate. The higher your balance, the higher your finance charges will be. Carrying a high credit card balance can cost hundreds of dirhams in a year, especially if you are only making minimum payments.
Qualifying criteria for credit cards and loans
Among a few other factors, credit cards and lenders consider the amount of credit card debt you have when you apply for a new account. Carrying high balances on several credit cards could hint that you have more debt than you can handle, which causes creditors to question whether you can handle another debt obligation. Thus, the institution may turn down your application for a new loan altogether. Maintaining low balances makes you a more attractive borrower, which is particularly important if you’re preparing to apply for a mortgage or auto loan.
Debt trap becomes real
Consistently paying no more than the minimum amount and carrying a high balance could lead to a situation where you have borrowed more than you can pay off. Debt happens when you repeatedly borrow more money than you are willing to pay pack. Having a high credit card balance, especially on more than one credit card, doesn’t help your debt situation. Keep your balances low, or paid off even, to avoid being in debt.
Lowers the available credit
One of the boons of a credit card is that you can use it to borrow money for various purposes, like funding your business or for emergencies such as hospitalization. But if you only pay minimum amounts and are already carrying a high balance, you may not be able to use your card for that particular need. With all transactions, the credit card issuer will place an authorization hold on a portion of your funds. If a high balance leaves you without enough available credit, you will have to reduce your balance, use another card, or, worse, cancel your expense altogether. So, paying your payments in full and having a credit card with a low balance helps you avoid having this issue.
It is often mistakenly believed that making the minimum payment on your card dues is sufficient. To avoid penalties, you must pay your bill on time. But to avoid heavy interest rates, you must also pay the bill in full. Don’t pay attention to the minimum dues, and make it a point to clear your full card balance every month. A history of late payments and other delinquent behavior can have a strong negative effect on your credit score and overall financial status for many years.
To avoid missing your due date, set a reminder on your phone a few days beforehand or mark the date on your calendar. You can also adjust your online account settings to always automatically pay at least the minimum required amount each month. Or, better yet, set up automatic payments to pay the full new statement balance each month. To avoid heavy interest rates, you must pay the bill in full. This can help you both stay out of credit card debt and avoid interest completely with most cards.