Understanding the Minimum Amount Due (MAD) on Your Credit Card Bill
When you receive your credit card monthly statement, you’ll see two amounts due: the Minimum Amount Due (MAD) and the Total Amount Due (TAD). The bank offers three payment options: MAD, TAD, and any other amount. Which one should you choose? Each option has its pros and cons.
What is the Minimum Amount Due (MAD)?
The Minimum Amount Due (MAD) is the smallest amount you can pay to keep your account in good standing. By paying the MAD, you avoid late payment fees and your account won’t be marked as delinquent. The MAD is typically a small percentage of your total outstanding amount for the month.
What Does the MAD Include?
The MAD includes the following:
- Card joining and annual fees
- Any interest charges
- Any EMIs
- Any other charges
- Taxes on all the above charges
For example, if you use a credit card to make purchases of Rs. 10,000 in a month, the MAD might be 2% of those purchases, which is Rs. 200. If the annual fee is Rs. 1,000, the MAD will include Rs. 200 (5% of the annual fee) and Rs. 180 (100% of the 18% GST on the annual fee).
What Happens if You Only Pay the MAD?
If you only pay the MAD, you postpone paying the balance amount and don’t eliminate it. This flexibility comes at a huge interest cost. For instance, if your monthly credit card bill is Rs. 20,000, and you pay the 5% MAD (Rs. 1,000), the balance of Rs. 19,000 will be carried forward to the next month. The bank will charge interest on this Rs. 19,000, which can translate into an annual interest rate of 36 to 48%, making it one of the most expensive loans.
Pros and Cons of Paying the MAD
Pros:
- Your account remains regular and won’t be marked as delinquent.
- The bank won’t charge late payment fees.
- Your credit score won’t be affected.
Cons:
- You’ll start incurring huge monthly interest charges of 3 to 4% of the outstanding amount.
- There’s a risk of falling into a debt trap.
- A higher credit utilization ratio (CUR) can negatively impact your credit score.
- Rolling over debt month after month can affect your credit worthiness.
Should You Pay the MAD and Carry Forward the Balance?
You should always aim to pay the entire monthly credit card bill before or by the due date. If you fall short, pay whatever is available over and above the MAD. Try to arrange for the remaining amount as soon as possible and clear the entire outstanding amount as soon as possible.
Conclusion
Paying only the MAD is not recommended. It can lead to huge monthly interest charges and a debt trap. Use the MAD flexibility as an exception during financial difficulties, but don’t make it a norm. Credit cards are tools for features and benefits, and you should pay the entire outstanding amount on time.
Reference : https://www.livemint.com/money/personal-finance/what-is-the-credit-card-minimum-amount-due-should-you-pay-it-and-carry-forward-the-balance-credit-score-11746161719516.html
