In your credit card statement, you will find a figure duly mentioned as the 'minimum amount due'. It is the figure that has to be paid to the bank for the purpose of ensuring that you do not fall under the defaulter category and continue using the card, without having to pay any extra charges. The figure serves as an indication to the bank that though you might not be able to pay the full amount presently, you intend to pay it when possible.
The minimum amount due is usually a certain percentage of the total outstanding balance. This is around 5%-10% and can vary across cards. The most important thing is although paying the minimum amount keeps your credit history clean, it does not reduce your total outstanding balance; it only takes care of interest and finance charges. With this you automatically slip into the interest rate cycle, and the interest starts accumulating on your remaining outstanding amount that is yet to be paid. This means there is actually a rise in your debt each month. If you miss the payment altogether, not managing to pay even the minimum amount, then there will be a non-payment charge that will be levied along with the interest. This leads to a double hit on this account.
A credit card company will love to have a customer who is happy to pay just the minimum balance. It is in the company's interest to keep you in debts for a longer period. Credit card companies use different formulas to come up with your minimum amount due and if you try to pay down your outstanding balance, they will reduce your minimum payment.
In many cases, the minimum amount due is the figure printed on the tear-off portion of the credit card statement. If you mistake this figure as the total payment to be repaid then unknowingly you might slip into the interest rate trap. For some, transferring the balance to another card can be a way to skip the payment, but beware as it is a temporary arrangement that adds to your overall balance.
There is a golden rule: the more you pay each month above your minimum monthly payment, the faster you will pay off the debt and the lower your total cost for using credit. So do not overlook your spending habits and try to pay twice or thrice the minimum amount due to avoid falling into a debt trap.
