Recently, the regulatory authority introduced a new credit card rule to protect users from the detrimental effects of negligent use. The new rule for credit cards was implemented on December 1, 2022, comes with an improved formula for calculating the minimum amount due on credit card bills.
The minimum amount due (MAD) is an amount that you are required to pay by the due date to avoid any penalty for non-payment of the credit card bill. In addition to that, paying this amount on time also saves your CIBIL score from going down.
With the help of MAD, bankers ensure that you at least pay some portion of the outstanding bill. It is typically fixed at around 5% of the total unpaid bill amount.
As per the new credit card rule, the MAD will now include the 100% interest component of the outstanding bill amount. Thus, going forward, the new formula to compute the minimum amount for the total unpaid bill on your credit card will be as follows:
(Amount Due x No. of Days from the Transaction Date x Monthly Interest Rate x 12) / 365
If you just pay the MAD, then the interest in the next statement will be levied on the balance principal amount and the new transactions (if any) until the previous bill is fully paid. Let us understand how the new rule works with the help of an example.
For instance, you make a transaction of ₹50,000 and your monthly interest rate is 2%, the interest component for 30 days will work out to be ₹1,000. Assuming that the GST is ₹200, you must make a minimum payment of ₹1,200 to cover the interest component fully.
The regulatory authority's new rule for credit cards mandates the issuer banks to determine a minimum amount high enough to cover these charges. Anything lower than this may amount to negative amortisation. Meaning that your interest on interest will keep piling up, and the principal amount will never be repaid if you choose to pay just the MAD, which can push you towards a debt trap.
As a smart user, you must always pay off the dues in full on or before the due date. Only under special circumstances, when it is not possible for you to pay the amount in full, can you try and pay the minimum amount due. However, ensure that this does not become a habit. Where a cash crunch persists for a foreseeable period, you can convert the outstanding balance into monthly installments (EMIs).
The new credit card rule directs a revised methodology of computing the minimum amount due, which came into effect starting on December 1 2022. As per this rule, the minimum amount due will now cover a 100% interest component and a small portion of the principal amount as well to avoid capitalisation of the interest charge. Expect a higher minimum amount due on your credit card bills.
The new rule will now cover the interest component fully and a portion of the principal amount in the minimum amount due. This will ensure that there is no negative amortisation and will avoid the interest and other charges from capitalising.
Earlier, banks set a minimum amount due (MAD), which was too low such that even if customers kept paying the MAD, they would still be unable to pay off the entire credit amount over time. With the new rules, institutions will charge higher MAD, including a portion of the principal amount so customers can clear their dues faster over time.
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