According to the Monetary Authority of Singapore (MAS), 64% of the cardholders in Singapore pay their full outstanding amount every month. This implies that Singaporeans are disciplined when it comes to using credit cards. The minimum payment on your credit card requires you to pay the smallest amount of the full payable, and failing to do so can invite penalties such as late payment fees, interest charges, poor credit score, etc. Each bank has its own way of calculating the monthly minimum payment for a credit card, although most banks usually ask for a minimum of S$50 or 3% of the total credit card bill.
It is very tempting to make the minimum payment and carry forward the rest of the balance to the next month. But if you keep making monthly lowest payments, here’s what happens:
If you are only paying the minimum amount, the money goes only towards the interest and not the actual balance borrowed from the bank. The typical credit interest rate in Singapore is 23% to 29%, and this rate is compounded every month. Your outstanding balance will keep piling on along with the interest, which would probably take you years to pay off. This is when you’ll realise that the compounded interest is almost half of your original outstanding bill.
While making payments for only the minimum amount due, you may be tempted to continue using your credit card for further purchases. What you fail to realise is that you are adding on to your bill amount. This will increase your outstanding debt because it will consist of your previous purchases, interest rates, compounded interest rates, and future purchases. This way, you will end up overshooting your credit limit or what you can afford to pay back. Hence, constant use of your credit card while making small payments is not a practical idea in the long run.
If you cannot afford to pay the entire outstanding amount, you can opt to pay the minimum amount. But this is not a healthy habit. You can try to pay a little more than the least required amount each month. This will help you lower your compounded interest rate and, at the same time, you can pay off the debt sooner. You can begin by paying the minimum amount along with a fixed extra amount per month. Gradually, you can increase the amount of this fixed value to keep decreasing the compounded interest rate. This, however, will not be possible if you own multiple credit cards and use all of your income to just pay your card balance. Then, it makes sense to only pay the least required amount to avoid late payment penalties.
Paying lower than what is required on your credit card can have several consequences, the most obvious being late payment charges. Other than this, the card issuer or bank may report your delay to credit information companies, leaving a long-standing effect on your credit report and credit score. Unless you and the card company have an understanding on a special repayment plan, you should pay at least the minimum amount. Your issuer can also choose to levy a penal interest on all your balances in the future, until you clear the dues or start making regular payments. This special APR is often as high as 28% to 30%, which will further impact your financial condition.
Paying only the minimum amount every month will not have a direct negative impact on your credit score. But, there may be indirect consequences that you should be aware of. You might be under the risk of increasing your credit utilisation, which should be kept under 30%. Credit utilisation is the percentage of your total available credit limit. For instance, if your outstanding bill is S$400 and your available limit is S$1,000, your utilisation would be at 40%. If you are close to reaching your credit limit, your credit score will take a massive hit and the high utilisation ratio may be recorded by the credit bureaus.
Do not fall prey to the “minimum amount” printed on your monthly bill because this will not help you achieve financial freedom or clear your debts faster. Avoid making this habit a long-term strategy as you will only end up paying the interest instead of the principal amount. If you have a cash-crunch and are unable to pay more than the minimum amount every month, you may try the debt consolidation as an option to get rid of credit card debt faster.