If you take the Minimum Payment Due as displayed prominently in your credit card statements seriously you are likely to be in serious trouble.
Minimum Payment Due (MPD) is at the most only 5% of your total outstanding balance on the card meaning that your total dues are twenty times to that of what you are asked pay a month. If you decide to pay only that you enter into a never ending cycle of revolving credit. The interest charges per month will eat up nearly half of your MPD payment depending on the size of the balance and so your payment will cover only about 3% of total dues. As you have to continue using your card for necessary purchases every month your total dues are likely to increase every month despite your MPD payments and so are the interest charges.
Credit card issuing banks know too well how to lull you into a cycle of revolving credit. They tell you to pay only the MPD because they know you can always afford to pay that paltry amount.
You have to get over that feeling of euphoria of being able to pay the MPD every month. You must focus on your total payment due and ponder over how to go about it. If you clear the full amount nothing like it because that way you can avoid paying any interest and if you time your purchases just after the date of your card statement you can get an interest free period of up to 50 days. If that is not possible then you should decide the maximum amount you can pay. One nice thing about credit card payment is that you can choose any amount of payment every month. If you clear a sizeable amount of your outstanding dues you immediately save interest charges on that amount.
You need to do some more calculations. If you go for a personal loan to clear your card outstanding dues you may, in fact, be paying more interest. For example, let us assume your outstanding is 1000 bucks and your rate of interest is 10%. Your equated monthly installments (EMI) will be arrived at by taking the loan amount plus the interest charges for the period. If you go for 12 months you EMI will be about 92 bucks. So, in effect, you have prepaid 100 bucks for interest. Now, if you clear that amount through 2 or 3 credit card monthly payments you can immediately see the interest amount you can save though credit card interest rate is higher. You have to remember that though interest rates are higher on credit cards these rates are calculated on daily reducing balance and so you can always try for optimization. You can also see that personal loan repayment tenure is never less than 6 months.
If you aim to manage your credit cards efficiently never even look at the Minimum Payment Due. Else it’s only MAD(Minimum Amount Due)ness!
Chinmay Chakravarty is a professional specialized in the creative field with over two decades of experience in journalistic writing, media co-ordination, film script writing, film dubbing, film & video making, management of international film festivals and editing of books & journals. Proficient in providing professional services in these related fields and also in fields of credit tips, personal finance and mediation help. Has a passion for making people laugh as often as possible and is interested in having a laughter club for doing away with everyday problems.