As our country is growing faster than ever before, so are the aspirations of people living here. Our mindset towards ‘Debt’ is changing drastically, earlier our parents were reluctant to take debt while we are not.

Taking a debt is not a bad idea, but it must be productive & most importantly we should understand it completely before going for it.

Credit Card debt is also one of those debts which is growing faster than ever before & is also one of the least understood types of debt. Credit Card Cycle & related terms have remained a puzzle for us, as it is intended by Card Companies.

You can read about the Credit Card terminology in our earlier post Credit Card Jargon…Let’s Make It Simpler

The Revolver’s Trap

Person who hasn’t paid Total Amount Due completely is called as ‘Revolver’. Often it is perceived that by paying Minimum Amount

Due (MAD) we can avail all the credit card benefits, but it’s not true in all respects. However, it can save us from spoiling our credit history, up to the point we don’t revolve our outstanding over our credit limit. But we can’t do away with the charges, penalties & interest, which will be imposed upon us.

Remember, there will be no interest free period till we pay our Total Outstanding Due completely, interest is charged even on new purchases for each and every day. 

This MAD gimmick is created by companies just to make sure that:

• We pay them well: companies want us to pay them more interest on the borrowings and they ask for MAD to maximize their profit by using it as a marketing trick.
• We don’t pay more at one go:  every month they show us an easy way out or escape route in the form of Minimum Amount Due to save ourselves from payment default. Also if we can’t pay total outstanding, then we focus ourselves only on minimum payment amount and that’s where we fall into the trap. But we should always pay more than MAD. Why?? Let’s discuss it with an example.

Minimum Balance Payment Scenarios for a Total Outstanding of Rs 50000

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We can clearly see that as the payment percentage is going down every month the required payment period and interest component increases exponentially…. So Pay Wisely

Let us try and understand by an example; what happens when we start paying minimum amount due on our credit card and revolve our debt.

[table id=8 /]

*For ease of calculation interest is calculated on the total outstanding in one go. However interest is calculated separately on each transaction from the day of transaction.

Even after paying Rs. 2236 in two months as MAD (excluding processing fee & service tax which will be extra) still total outstanding is Rs. 24189 and debt is just reduced by 25000-24189 = Rs 810. This is just a 2 month scenario and with a MAD of 5%, but, if we have a card which accepts MAD lesser than 5% then god help the card holder. Interest component will increase exponentially as we go below 5% MAD, it will become more than principle & even many folds of it… Think over it.

Learning:

• Always clear your Total Outstanding balance well in time or pay as much as you can over and above the asked Minimum Amount Due.
• Opt for a card which asks for a higher Minimum Amount Due. Lower the MAD, bigger is the Trap.
• A little extra payment per month can substantially reduce your interest component & months required in Pay Off.
• If you have any unpaid outstanding on your card then stop using your card till you pay off your outstanding completely. You have to pay interest also on new purchases, as there will be no interest free period.

I hope by now you would have understood basic terms related to Credit Card & the ways by which we can use our credit card the way it works for our benefit rather than somebody else’s.

Do send us your queries and comments.