Financial Planning
It’s a trap! Here's how to stop falling for the “minimum amount payment” scheme
Credit cards have made our lives easier. These days, everything is just a swipe away. However, this convenience comes with a hidden risk that most overlook – the minimum payment debt trap. When left unchecked, it can become a long-term financial burden.
Understanding minimum payment debt trap
When your credit card bill arrives, look at it carefully because it presents two choices:
- Pay in full
- Pay the minimum amount due (usually around 5% of the total bill)
The second option might seem like a relief, especially if the bill is on the higher side. However, this is just the beginning of a debt trap. The unpaid balance is carried forward and usually, at a high interest rate. As the interest compounds every month, your debt grows even when you don’t use the card
Case study: Minimum payment debt trap
Vishal bought a TV for ₹70,000 on his credit card. When the bill arrived, the minimum amount due was ₹3,500 (5%). Vishal thought, “I’ll just pay ₹3,500 for now and take care of the rest later.”
But the unpaid ₹66,500 started attracting monthly interest at 3.5%. That’s about ₹2,327 interest in the first month alone. If he continues paying only the minimum, most of his payment goes toward interest rather than reducing the principal.
Over time, his outstanding amount barely reduces — this is how the debt trap starts.
Avoiding the minimum debt trap
- Try to repay the balance in full whenever possible. If not, pay more than the minimum amount due.
- Avoid any additional charges on the credit card while paying down your balance.
- If possible, transfer the balance to a card with a lower interest rate.
- Stick to a monthly budget to avoid overspending.
Conclusion
Financial discipline and budgeting are needed to get out of and avoid a minimum debt trap. Doing this lets you enjoy the convenience of the credit card without long-term burden.
Disclaimer: This article is intended solely for informational purposes. The views expressed in this article are personal. Axis Bank and/or the author shall not be liable for any direct or indirect loss or liability incurred by the reader arising from reliance on the content herein. Readers are advised to consult a qualified financial advisor before making any financial decisions. Axis Bank does not endorse or guarantee the accuracy of any third-party content or links included in this article.
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