Mar 222012
 

Credit card usage is in India is in increasing trend over the years. The plastic money offers vide range of facilities and comfort apart from avoiding the risk of carrying money in hand. Credit cards if used wisely can aid you manage your finances effectively. But on the other hand, the usage of credit cards without knowing the implications of the same will end you up in greater trouble.

One of the options offered by the Credit card companies to its card holders is the scheme of payment of “Minimum due amount”. The credit card companies fix a minimum sum that needs to be paid in a month in order to maintain the good status of the Credit Cards. For example, the minimum payment due will be 5% of the total amount due (or) Rs. 500/- whichever is higher. Assuming that there is an outstanding in the Credit card amounting to Rs. 20000/-, it will be enough if the credit card holder pays only Rs. 500/- to maintain the good standing of the credit card account. It looks very simple and very easy for the credit card holders. Many credit card holders presume that by payment of the minimum payment due, the entire outstanding can be cleared in a mater of 20 months (20 months x 5% of outstanding = 100% of outstanding). But the reality is not known by many of the credit card holders. Unknowingly, may card holders choose to pay the minimum amount due and at one point of time, unable to make the payment due, gets into the debt trap. Getting caught in a debt trap will be a worst situation and the credit worthiness of the the card holders will so be in stake. This will also lead to deactivation of the credit card and a bad credit rating in the CIBIL report, which is likely to affect the future borrowings of the credit card holder.

The following table explains the real situation :-

Credit card outstanding Amount   :-       Rs.20000/-

Minimum Amount due                 :-       5% of the outstanding ,  minimum of Rs.500/-

Rate of Interest                          :-       3.35% per month

 

Months

Purchases/
Opening
Balance
Minimum
Amount
Due paid
Interest
@ 3.35% p.m
Service Tax
@ 10.3%
Total
Interest &
Tax
Principal Closing
Balance

1

20000

1000

670

69

739

261

19739

2

19739

987

661

68

729

258

19481

3

19481

974

653

67

720

254

19227

4

19227

961

644

66

710

251

18976

5

18976

949

636

66

702

247

18729

6

18729

936

627

65

692

244

18485

7

18485

924

619

64

683

241

18244

8

18244

912

611

63

674

238

18006

9

18006

900

603

62

665

235

17771

10

17771

889

595

61

656

233

17538

11

17538

877

588

61

649

228

17310

12

17310

866

580

60

640

226

17084

13

17084

854

572

59

631

223

16861

14

16861

843

565

58

623

220

16641

15

16641

832

557

57

614

218

16423

16

16423

821

550

57

607

214

16209

17

16209

810

543

56

599

211

15998

18

15998

800

536

55

591

209

15789

19

15789

789

529

54

583

206

15583

20

15583

779

522

54

576

203

15380

21

15380

769

515

53

568

201

15179

22

15179

759

508

52

560

199

14980

23

14980

749

502

52

554

195

14785

24

14785

739

495

51

546

193

14592

25

14592

730

489

50

539

191

14401

26

14401

720

482

50

532

188

14213

27

14213

711

476

49

525

186

14027

28

14027

701

470

48

518

183

13844

29

13844

692

464

48

512

180

13664

30

13664

683

458

47

505

178

13486

31

13486

674

452

47

499

175

13311

32

13311

666

446

46

492

174

13137

33

13137

657

440

45

485

172

12965

34

12965

648

434

45

479

169

12796

35

12796

640

429

44

473

167

12629

36

12629

631

423

44

467

164

12465

37

12465

623

418

43

461

162

12303

38

12303

615

412

42

454

161

12142

39

12142

607

407

42

449

158

11984

40

11984

599

401

41

442

157

11827

41

11827

591

396

41

437

154

11673

42

11673

584

391

40

431

153

11520

43

11520

576

386

40

426

150

11370

44

11370

569

381

39

420

149

11221

45

11221

561

376

39

415

146

11075

46

11075

554

371

38

409

145

10930

47

10930

547

366

38

404

143

10787

48

10787

539

361

37

398

141

10646

49

10646

532

357

37

394

138

10508

50

10508

525

352

36

388

137

10371

51

10371

519

347

36

383

136

10235

52

10235

512

343

35

378

134

10101

53

10101

505

338

35

373

132

9969

54

9969

500

334

34

368

132

9837

55

9837

500

330

34

364

136

9701

56

9701

500

325

33

358

142

9559

57

9559

500

320

33

353

147

9412

58

9412

500

315

32

347

153

9259

59

9259

500

310

32

342

158

9101

60

9101

500

305

31

336

164

8937

61

8937

500

299

31

330

170

8767

62

8767

500

294

30

324

176

8591

63

8591

500

288

30

318

182

8409

64

8409

500

282

29

311

189

8220

65

8220

500

275

28

303

197

8023

66

8023

500

269

28

297

203

7820

67

7820

500

262

27

289

211

7609

68

7609

500

255

26

281

219

7390

69

7390

500

248

26

274

226

7164

70

7164

500

240

25

265

235

6929

71

6929

500

232

24

256

244

6685

72

6685

500

224

23

247

253

6432

73

6432

500

215

22

237

263

6169

74

6169

500

207

21

228

272

5897

75

5897

500

198

20

218

282

5615

76

5615

500

188

19

207

293

5322

77

5322

500

178

18

196

304

5018

78

5018

500

168

17

185

315

4703

79

4703

500

158

16

174

326

4377

80

4377

500

147

15

162

338

4039

81

4039

500

135

14

149

351

3688

82

3688

500

124

13

137

363

3325

83

3325

500

111

11

122

378

2947

84

2947

500

99

10

109

391

2556

85

2556

500

86

9

95

405

2151

86

2151

500

72

7

79

421

1730

87

1730

500

58

6

64

436

1294

88

1294

500

43

4

47

453

841

89

841

500

28

3

31

469

372

90

372

385

12

1

13

372

0

Total

33381

3434

36815

20000

Total Int & Principal

56815

The perusal of the above table reveals the following :-

1)     It will take 90 months (7 ½ Years) to clear the outstanding amount.

2)     The total amount paid in these periods work out to 56815/- which is more than double the amount borrowed.

3)     If in any any of the months, if the minimum amount due is not paid, the card holder has to pay additional fees and penal charges.

4)     It is assumed that the credit card holder does not make any further purchases in the credit card. If there are any additional purchases during the month, the minimum due amount and interest payout will be much higher.

How to come out of this situation :-

1)     Credit card is not an alternative for money. Consider it as another form of money. Hence, use it only when you have it (ie., have cash balance).

2)     Due to unavoidable circumstances, if you are not able to pay the entire credit card outstanding, try to convert the big purchases into EMIs , if the rate of interest on EMI is less than the rate of interest on credit card outstanding.

3)     If possible, go for either personal loan (or) Jewel loan and close the entire outstanding and start paying the personal loan / Jewel Loan in EMIs. This will considerably reduce the Interest burden and you will be out of the debt much earlier than the tenure if you pay through the minimum due method.

4)     Last but not the least, use the credit card only when it is absolutely necessary.

Instead of getting into the trap and then blaming the Credit card companies, let us use the credit cards wisely and reap the benefits the plastic money offers.

Contact us @ 91-44-45540180 / 91-91505 75680. For Quick Response email :- sridharca@gmail.com

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