Summarize

Simplifying... Inshort

Paying only the minimum amount due on your credit card bill can lead to a debt trap, as it leaves a larger outstanding balance that accrues interest over time.
For instance, if a bill is ₹1 lakh, an IDFC Bank customer's minimum due would drop from ₹5,000 to ₹2,000, but this means they'll accrue interest on ₹98,000 instead of ₹95,000.
Banks are lowering the minimum due to encourage regular payments and avoid defaults, a strategy that increases their revenue as customers pay interest on the remaining balance.

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IDFC First Bank has reduced minimum payment from 5% to 2%

This new credit card rule is a debt trap

By Mudit Dube

Jul 29, 2024

05:19 pm

What's the story

Some Indian credit card users might be facing a hidden cost due to recent changes related to the billing process. Starting August 1, IDFC First Bank will decrease the minimum amount due on its credit cards from 5% to 2% of the principal payable amount. This move follows a similar policy change by Axis Bank in November 2023. However, this temporary ease of a lower minimum payment could result in higher interest costs for credit card users.

Financial impact

Paying minimum amount can lead to a cycle of debt

The minimum amount due is the bare minimum required to be repaid monthly to maintain good standing and avoid late fee charges. While a lower minimum payment reduces the immediate burden of repayment, it leaves a larger outstanding balance. This larger outstanding amount accrues interest over time, potentially increasing the total amount you end up paying. Hence, paying only the minimum amount can lead to a cycle of debt and increase the overall interest paid.

User consequences

Lower minimum due: A double-edged sword

For example, if a credit card bill totals ₹1 lakh, the minimum amount due would decrease from ₹5,000 (5%) to ₹2,000 (2%) for an IDFC Bank customer. As per Parijat Garg, a digital lending consultant, "the credit card user can now avoid late payment charges and reduce the impact on his or her credit score by just paying ₹2,000 instead of ₹5,000." However, users will now accrue interest on an outstanding balance of ₹98,000 instead of the previous ₹95,000.

Bank strategy

Banks benefit from lower minimum due amount

Dev Ashish, founder of StableInvestor.com, warned that "if you have an unpaid amount left over from your previous bill, you don't get any interest-free period for your transactions thereafter. You will be charged interest from the date of the transaction itself." Banks are reducing the minimum due amount to encourage more regular payments and prevent defaults. This strategy not only benefits banks but also potentially increases revenue as customers rolling over their balance pay interest on the outstanding amount.