What is Credit Card Minimum Payment Debt Trap?

Credit cards are increasingly being used in India. Not just one, but people now prefer keeping multiple credit cards due to the benefits offered and the variety available. However, when it comes to paying your credit card debt in the end, probably during the end of each billing cycle as you receive the statement, there are things to take care of to not fall into a trap of debt.

Paying Minimum for Credit Cards

Many do the mistake of paying just the minimum amount due at the end of each billing cycle. This creates a debt trap which makes you pay quite a huge amount in the very end.

As you receive the credit card billing cycle statement, it contains the total amount you are supposed to repay. With that, it also contains the minimum amount you can pay for the time being. Now, many consider this an opportunity to avoid paying fully at that time. They continue paying only the minimum amount due several times, thinking they would pay back the remaining amount later on.

Unfortunately, they fail to understand that as they do not pay the full amount and end up paying just the minimum payable amount, the remaining amount goes on increasing with time as there is interest charged on the balance.

The Credit Card Minimum Payment Debt Trap

The situation you get trapped in with credit card minimum payment is referred to as debt trap. If you've been paying just the minimum amount for, say 12 months, you get into a trap or cycle of debt. It lets you avoid late fees. It also keeps your account active. However, because you pay only the minimum amount, interest charged each statement cycle is on a higher remaining amount.

This totals up to a comparatively very high amount to be paid in the end as debt, making it much difficult to pay off the complete credit card debt.

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An Example

Take a look at the following example:

Here, just paying the minimum amount rather than the full one, has led to the interest being charged on a higher amount (the principal or the opening balance at that time). Going this way for 12 months has led to a higher total interest paid for the year. Most of what you paid has been spent on interest charges, rather than towards reducing the debt.

How to Avoid Credit Card Minimum Payment Debt Trap

If you wish to avoid falling in this kind of debt trap, here are some ways to follow:

Pay More: Try to pay more than the minimum amount due each month, when lacking the complete amount payable. Remember, as much due you pay, proportionally lesser interest will be charged for you.

CUR: Your Credit Utilization Ratio needs to be below 30%. Whatever credit limit you've been given, make sure you spend only 30% of it maximum. A low CUR keeps up a good credit score.

Credit Card Limit: While you must not finish the limit, you should be cautious where you are using the credit card. Make sure to not carelessly spend with the card, as you need to keep a limit.

Expert Help: You can always speak to the experts in the field. They will better guide as to how you can manage debt better.

Clear High-Interest Debts: Also choose to get rid of high-interest debts first. This may seem a burden for now, but will later on seem like a burden removed from your shoulders.

Final Thoughts

It is anyways better to repay the full amount when paying for your credit card. This leaves no room for stress. This option may be a little hard in the beginning, as you will be making considerable payments, but it will let you avoid the debt trap which could affect your finances badly later on.

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