Credit Card – Avoid the habit of paying minimum amount due!
Rajiv was very happy to get a credit card, within 30 days into his first job in Mumbai. The cobranded credit card offered him 2% discount on select food outlets, where he is a usual visitor. What is more, he found the card very useful for withdrawing cash also in case of emergencies. The most attraction was the ‘minimum amount due’ which Rajiv has to pay on due date which was very reasonable against his huge spending for the month!
Rajiv is just 1 year into his first job. He is now finding it difficult to manage his credit card balance. The minimum amount due concept is a danger area in the credit card business, which can take you into the credit card mess, with no escape route. Let us see how it works.
Rajiv used the card at various merchant outlets in the first month and the total amount due was 12,000/-. But the minimum amount due was only 600/-. He paid this 600/- happily and continues to use his card. Next month, he purchased a TV for 11,000 using the card and made cash withdrawal of 3000/-.Let us see, how his bill was 26,162 in the next bill.
The amount outstanding from the previous bill: 11,400
Interest on this at the rate of 3% per month: 342
Amount spend in the second month: 11,000
Interest on this at the rate of 3%: 330
Cash withdrawal: 3000
Interest on this: 90
Total Amount Due: 26,162
With 30,000 net salary, how he will pay the amount of 26,162/-? Again the devil quoted 1308/- as the minimum amount due and he paid it happily.
The same story repeated for almost 6 months and now his card balance has exceeded the limit of 1 Lakh. The card company has blocked his card and now he is in utter trouble! He cannot repay the amount of 1 Lakh and at the same time, he cannot stop his spending habits developed over the past 1 year.
Yes, credit card is a good tool, if you use it in the correct way. But you have to pay the full amount on due date, to avoid the high interest rate of 2.5 -3% per month! Once you start paying the ‘minimum amount due’, it will be very difficult for you to clear the dues and escape from the financial trap.
What is more, it will damage your credit score and you will not get any further loans in future!
If you cannot resist the temptation of controlled spending, don’t use credit card but use debit card. In this case, you will not be allowed to spend more than what is in your bank account.
Melvin Joseph
SEBI registered Investment Adviser
SEBI registration number -INA 000000342
Finvin Financial Planners
10. Ground Floor, Olive Excel CHS Ltd
Plot No- 16, Sector 42, Nerul, Navi Mumbai – 400 706
Mobile: 91 9820843739
Website : http://www.finvin.in
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