How much should you pay on your credit cards?

Had your fun flying high in the wings of credit-card-powered buying spree? Now let's land for once, it's time to pay up!

India is one of the largest users of credit cards, with a user base of over 71.7 Million, as of March 2022. According to a recent RBI report, an Indian credit card user, on average, spends around Rs. 14,500 using the credit card monthly. This massive adoption of credit cards among people can be attributed to the various benefits of credit cards, notably how they have eased the buying process and their advantageous pay-back period.

However, personal finance specialists often advise people to be cautious while using credit cards; if used carelessly, they can put the user into a big debt during credit card payments.

This article talks in detail about how much you should pay on your credit card, how you can use it optimally and a few other important things. So, read on!

How does credit card work?

Credit Cards are payment cards issued by financial institutions (generally banks) to allow their users to borrow funds from them for purchases up to a certain limit. This limit is known as the credit limit of the card. One need not pay any interest amount on the money borrowed via a credit card as long as they make the payment for the borrowed funds by the due date. If the credit card payments are not made by the due date, interest is levied on the outstanding balance. This interest rate is usually high.

Some credit card issuers also provide an overdraft facility, wherein the credit card users can borrow funds more than the sanctioned card limit; however, they need to pay interest on this extra credit amount. Thus, this facility should only be used in case of emergencies to avoid paying extra interest and fees.

How is Interest on Credit Cards Calculated?

The interest is not charged to each user of credit, rather it is restricted to the user who does not make full credit card payments in a credit-free period. Let us take an example to understand this better.  Assume that the credit card bill for Mr. A for the past month is Rs. 25,000 and he wishes to pay a part of the credit card bill, say, Rs. 15000 by the due date. Now, the outstanding amount of Rs. 10,000 will attract interest from the credit card issuer as per the below formula - 

Interest on credit card = (Total number of days from date of transaction till due date * the amount of outstanding balance * rate of interest charged per month * 12 months)/365

For this, let’s assume the date of transaction for Rs. 25,000 was April 01, 2022, and the credit card bill was due on April 30. Now, if Mr. A’s credit card issuer charges a monthly interest rate of 4%, then his interest liability will come out to be:

Mr. A’s Interest Liability = (30*10,000*0.04*12)/365 = Rs. 394.5

If you want to calculate your compound interest then here is the calculator for you.

How Much Should You Pay on Your Credit Card?

One can adopt the following strategies according to their financial position; however, the first one is the ideal and the best way for managing credit card finances.

•  Ideal Strategy - Paying Full Credit Amount
  It is always advised to make full credit card payments every month. This enables credit card users to avoid paying any hefty interest amount on the balance and enjoy peace of mind, with no withstanding amount. The longer a user takes to make a credit card payment, the higher the amount of interest they have to pay. Moreover, by paying the full credit card amount, users can also enjoy several other benefits offered by the credit card issuer like a lower interest rate for future due balances, high credit limits, availability of overdraft options, etc. Paying the full credit amount also helps one keep the full credit limit available to themselves in the next credit month cycle. 
  Always remember, the quote by Oscar Wilde, “A man who pays his bills on time is soon forgotten” (by his creditors).

• Neutral Strategy - Paying a Minimum Balance
  If users are unable to settle the complete credit bill at the month end, they must make a  minimum credit card payment. This avoids one getting trapped under a heap of debt several months down the line. However, how much should be the minimum due on a credit card? Well, a minimum due in credit card means 50%-70% of the availed credit, so that the user can keep their finances in check even for the next month. Paying minimum due on credit cards helps one keep the interest liability in control while they arrange for the deficit funds.

Use your credit card wisely and keep a track of your finances easily using our Recipe's Debt Diagnosis. 

Ways to Optimally Use Credit Card

The following are some of the ways in which one can make optimal use of a credit card.

1. Use Credit Card Responsibly
   One must use a credit card responsibly and in a rational manner. It must not be used when one can pay in cash or use a debit card. Judicious use of credit cards helps its users maintain a good credit score and keep their repayment liabilities low.

2. Opt for a Low Credit Limit
   Another way to use a credit card in an optimal manner is by keeping its credit limit low. When the user won’t have a facility to withdraw a lot of money, they would be at risk of spending unnecessarily even when they are tempted to do so at times.

3. Keep a Check on Credit Card Usage
   One must monitor their spending habits and the remaining credit limit in a month. This helps one in making informed credit decisions. 

Conclusion

Credit Cards were introduced to help people meet their financial obligations even when they had low financial balances. Today, it has become highly convenient and easy for anyone with a stable income to obtain a credit card. However, one must remember to use this facility judiciously and carefully to avoid any long-term and painful debts. A credit card user must ensure that they make the full credit card payments by the due date or at least a minimum amount. This not only helps one reduce their financial liabilities but also helps them enjoy their life in a stress-free manner. Here are the list of top credit cards with best APR.