Paying Minimum Amount Due on your credit card bill? Compounding interest spirals into MAD debt issues; explained

Many credit card users are falling into unexpected debt traps. This happens through the Minimum Amount Due (MAD) payment option. Several cases reveal how this seemingly-harmless choice backfires.

Mint Money referred to Ashutosh Singh, who got his first credit card in 2023. He was 26 and planning an MBA education loan. When his bill arrived, the minimum amount appeared pre-selected.

The payment app didn’t explain what this option meant. Singh assumed it let him safely defer the remaining balance. This assumption is dangerously-common among new cardholders.

Some users say their settings changed entirely without their knowledge. In Bengaluru, IT consultant Raghuvendra always used autopay. He discovered his setting had secretly switched to minimum due.

He only noticed after finance charges appeared unexpectedly. He contacted his relationship manager, and charges were eventually reversed. This process took over a month of persistent follow-up.

He faced a separate issue with another bank. A scheduled payment once disappeared from the system. He has since stopped completely trusting autopay systems.

Another case involved a finance professional’s wife. Recurring finance charges initially started at around ₹12,000 per month. These charges eventually rose to ₹20,000-25,000 per month.

He traced this back to her HDFC credit card account. Her autopay had unexpectedly switched to the minimum. The bank refunded some charges but never explained why.

Raj Khosla, founder of MyMoneyMantra, confirmed this pattern elsewhere. Similar practices have been documented across other banks, too. Common causes include UI glitches and system errors.

According to HDFC Bank, it doesn’t unilaterally change customer instructions. Customers can switch settings directly through banking channels.

Beyond autopay glitches, the minimum due itself misleads people. It typically represents just 5-10% of the total bill. Paying it avoids late fees and immediately protects credit scores.

This makes the underlying risks less obvious to consumers. Pawan Kumar, a software engineer, learned this lesson the hard way. Unknowingly, he paid only the minimum for 6 months.

His credit score remained stable throughout this period. However, interest charges eventually exceeded his original card spending. A colleague finally explained what minimum due actually meant.

Bhavesh Jain of TransUnion CIBIL explained the underlying mechanics clearly. Paying the minimum due prevents you from being marked as a missed payment. However, unpaid balances remain on the account regardless.

High balances carried for months raise credit utilisation levels. This can affect credit scores gradually over extended periods.

The higher cost involves losing the interest-free period entirely. Interest applies to both unpaid balances and new purchases. Annual rates typically range between 20-32% at the moment.

Ritesh Srivastava of Freed explained this retrospective interest calculation. Interest applies if ₹10,000 is paid from a ₹1 lakh bill. This applies to the remaining ₹90,000 from the payment date.

Every new transaction also loses its 45-day interest-free window. This compounds financial pressure on cardholders significantly over time.

The RBI mandates banks to explain these risks clearly in their statements. Statements must warn that minimum payments stretch repayment considerably.

However, this mandate falls short in practice today. Most customers now view bills through mobile apps instead. These apps rarely explain the implications of interest clearly on-screen.

Mint Money recently reviewed several banking apps and payment platforms. Most show a minimum due without explaining the associated interest costs. CheQ was the only platform explicitly warning about interest charges.

Srivastava argues that warnings need to be placed where payments actually occur. Statements arrive via email, but payments occur within apps. These represent two entirely different places.

He suggests that banks should display costs near the payment button. This concern intensifies when the minimum due appears pre-filled. Customers might simply confirm the amount already selected.

A minimum due can occasionally help avoid missed payments. However, experts stress it should remain a genuine last resort. Compounding interest can otherwise spiral into serious debt problems.

Example of MAD trap

Let’s walk through an example step by step. On 3 July, Deepika Bhatt spent ₹10,000 on groceries and household items. On 20 July, she spent ₹55,000 on electronics. By 30 July, her total bill came to ₹65,000. Both purchases still fell within her interest-free period at the time.

On 5 August, Deepika paid only the minimum amount due. This came to ₹6,500, roughly 10% of his bill. This single choice changed everything for her account.

The remaining ₹58,500 got carried forward to next month. Crucially, it also retroactively cancelled her interest-free period. So, even her earlier purchases now attracted interest, both in grocery and electronics spending.

Going forward, all new spending will also lose interest-free treatment. On 10 August, Bhatt spent ₹12,000 on groceries again. On 18 August, she spent ₹20,000 eating out.

These fresh purchases started accruing interest immediately this time. There was no grace period for them anymore. By 30 August, her new bill totalled ₹93,350. This included ₹2,850 in interest charges alone, GST included.

The lesson here is simple but important. Paying only the minimum doesn’t just charge interest later. It removes interest-free protection on everything going forward. This is calculated at a 30% annual interest rate.