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Know how paying minimum balance on credit cards affects your CIBIL score and why it isn’t always enough to protect yourself financially.
When you receive your monthly credit card statement, you can pay the full balance, a partial amount, or the minimum amount due by the specified due date.
Paying only the minimum amount keeps your account in good standing and helps you avoid late payment penalties. However, it can negatively affect your CIBIL score over the long term.
While these payments are marked as on time and do not directly lower your score, they can lead to high interest costs, prolonged debt, and financial stress. Issuers usually report your balances each month to credit bureaus, and they use this information to calculate your score.
The issuer will still charge interest on the remaining balance even if you pay the minimum amount. This also increases your credit utilisation ratio, which negatively impacts your credit score in the long run.
This action can have different impacts based on your habits:
Short-term Impact
No Late Fee: You will avoid late payment penalties if you pay the minimum due before the due date
On-time Record: The lender will mark it as a timely payment, which will reflect positively in your credit history
Interest Charged: The remaining balance will accrue interest, which you are liable to pay in future billing cycles
Impact Over the Long-term
Over time, consistently paying only the minimum due may indicate difficulty in managing credit effectively.
Increased Cost: You will end up paying much more than the amount you originally spent
Credit Utilisation Risk: Carrying high balances will regularly increase your credit utilisation ratio
Negative Impact on Score: A utilisation ratio above 30% can lower your credit score
Debt Cycle: Paying only the minimum will keep you trapped in debt for a longer period
Most finance experts suggest that you need to strive to keep your credit utilisation ratio under 30%. So, consider paying the minimum amount due when you face a financial crunch.
Credit card issuers calculate the minimum payment using your total balance, interest rate, and a small percentage of the principal.
Suppose your credit card balance is ₹50,000, the annual interest rate is 18%, and the minimum payment requirement is 5%.
The formula for calculating the minimum due on a credit card is:
(Outstanding Balance × Minimum Payment Percentage) + Monthly Interest (18% ÷ 12 months)
= (₹50,000 × 5%) + (₹50,000 × 1.5%)
= ₹2,500 + ₹750
= ₹3,250
In some cases, paying only the minimum due by the due date can be a useful choice. If you pay the minimum balance, credit bureaus don’t mark your account as “delinquent” or “past due.” This prevents a severe negative impact on your credit score.
Moreover, during a financial emergency, such as a sudden medical bill or loss of income, it allows you to allocate your funds to more urgent needs. It could prevent you from taking a bad debt during financial distress, and thus, safeguarding your CIBIL score.
Paying the minimum balance directly impacts your Credit Utilisation Ratio, which is the percentage of your available credit that you use. A ratio consistently over 30% indicates that you are overly reliant on credit, which can significantly lower your CIBIL score.
Consistently making only minimum payments can be a red flag for potential lenders. It suggests you may be struggling to manage your finances. As a result of a high utilisation and increased debt burden, a lower CIBIL score will make it more difficult to get approval in the future.
In this case, the lender will consider it as an on-time payment. So, it will not affect your credit score directly. However, if you consistently pay only the minimum amount, your credit utilisation ratio will increase, and your CIBIL Score will get impacted negatively.
It measures how much of your available credit you use. Lenders check this ratio to assess how you manage debt. You can improve your credit utilisation ratio by reducing your outstanding balance.
It is usually recommended that the credit utilisation ratio should be below the 30% mark. This enables you to avoid any negative impact it may have on your credit score.
Paying only the minimum balance prevents late payment charges and helps maintain your credit score temporarily. However, paying the full statement balance is always better, as it avoids interest charges, supports long-term credit score improvement, and helps you stay debt-free.
If you pay less than the minimum balance, the bank will charge a late payment penalty and you will lose your interest-free period. Over time, this can also negatively affect your CIBIL score.
Your score may decline due to a high credit utilisation ratio too. Using a large portion of your available credit signals a higher risk to lenders. If this continues for several months, it can lower your credit score despite making minimum payments.
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