The Minimum Amount Due Trap

The RBI requires every card issuer to print this warning: making only the minimum payment every month would result in the repayment stretching over months or years with consequential compounded interest. That is paragraph 9(b)(iii) of the RBI’s 2022 Master Direction on credit cards. Most people read past it.

What does a monthly card rate work out to over a year?

Card interest is quoted per month and compounds monthly. So the annual cost is not the monthly rate times twelve. It is higher. The table below is plain arithmetic on a ₹1,00,000 balance held for a full year with no further spending.

These are illustrations, not any issuer’s rate. Your own monthly rate is printed on your statement and in the Most Important Terms and Conditions of your card. Put your number into the same formula. Multiply the monthly rate by twelve and you will understate the cost every time.

Why does paying the minimum barely reduce the balance?

The minimum is a small share of what you owe. Your card’s terms define it. It is designed to keep the account current, not to clear it.

Here is the mechanism. Your payment is applied against interest and charges first, then against the principal. At a monthly rate near 3.5%, the interest alone on the balance is a large part of a typical minimum. What is left to reduce the principal is small. So the balance falls slowly while interest keeps accruing on what remains.

Then the second effect arrives. Because you did not clear the statement in full, the interest-free period is suspended. New purchases start accruing interest from the transaction date. There is no grace period any more. Many people notice their next bill is worse despite having paid something, and this is why.

What protections do the RBI rules give you?

Two matter here. First, unpaid charges, levies and taxes must not be capitalised for charging or compounding interest. That is paragraph 9(b)(ii) of the Master Direction. An issuer cannot charge interest on the GST or on a late fee.

Second, the issuer must disclose that the interest-free credit period is suspended if any balance from the previous month is outstanding. That is in the same paragraph 9(b)(iii) as the minimum-payment warning.

Billing disputes have their own rule. The issuer must give you an explanation, with documentary evidence where applicable, within 30 days of your complaint. That is paragraph 10(b). If a charge on your statement is wrong, dispute it in writing and start the clock.

How do you get out once you are revolving?

1. Stop using the card. New spending has no grace period while you carry a balance.
2. Pay the full statement balance in one month if you possibly can. That restores the interest-free period from the next cycle.
3. If you cannot, convert the balance to an EMI or move it. A card EMI at a stated annual rate is far cheaper than revolving. So is a personal loan for most borrowers.
4. Rank multiple cards by their monthly rate and clear the most expensive first.

Our balance transfer page covers moving the debt and what the transfer actually costs. Credit card debt covers the order to pay things in when several cards are involved. If the numbers are large, read how to get out of debt before you take another product.

Does paying the minimum hurt your credit score?

Not directly. Paying the minimum by the due date keeps the account reported as current, and payment history is the heaviest factor in a score.

The damage is indirect and it is real. A revolving balance pushes up your credit utilisation, which is a significant scoring factor. A balance that keeps growing pushes utilisation higher every month. So the strategy that protects the score in month one erodes it by month six. See credit utilisation ratio.