The same object that allows you to fulfill dreams in easy installments can also be the cause of bad debt with its exorbitant interest rates. In the end, did the credit card come to help or complicate our financial lives?

How does a credit card work?

This is one of the most widely used forms of payment, not only in Brazil but worldwide. It's so common to take it out of your wallet, pay in installments, and wait for the bill that we rarely stop to think about how a credit card really works.

Surprisingly, it functions as a type of loan, since when we use our credit cards, we have up to 40 days to pay for what we've purchased. During this period, banks or financial institutions "lend" us that amount.

When you apply for a credit card, it always comes with a limit set by the issuing company. This limit is usually determined based on your credit score, monthly income, and other factors. The limit is the amount that will be loaned to you and represents the maximum amount you can spend.

A common question about the limit is how it works when it comes to installment purchases: to the surprise of many, the installments must also be within the established maximum value.

For example: if today you have an available credit limit of R$ 800.00 and make a purchase in installments, in 4 payments of R$ 200.00, your credit limit will be tied up for 4 months with that same purchase until the payment is completed.

Therefore, carefully plan the number of installments for your purchases, in case you need to use the credit limit in the future.

Why do so many people get into trouble with their credit cards?

63% of Brazilian families are currently in debt.

Whether due to the crisis or reasons prior to it, this number is even more alarming when we look closely at the cause of the debt: of these indebted families, 79.8% cite credit cards as the cause.

Although already very high, this number has been on an upward trend over time: in the same period in 2019, the total number of families indebted through credit cards was 78.4%.

If your accounts don't balance at the end of the month, your credit card bill might be a prime suspect, since it's much easier to lose control of your spending by paying in installments than by paying in cash or with a debit card.

When this happens, the option to pay the bill in installments seems very tempting, and that "pay the minimum amount due" button (usually 15% of the total amount due) makes our eyes light up. But it's worth remembering that this is where the infamous interest comes in, which can reach no less than 300% per year.

To make matters worse, the average time Brazilian families spend paying their credit card bills in arrears is more than 3 months. In other words, with each passing month, the calculation becomes interest on top of interest, and here we are talking about the highest rates on the market.

Imagine the snowball effect this could become?

What are the most common mistakes when using a credit card?

1- Not anticipating expenses within the budget

When we put together our budgets, we know how much each line item costs us: "household bills," "medical expenses," "education expenses," but do you have a line item just for credit card expenses?

Going further: today, would you know the maximum amount you can spend on your credit card without compromising other basic needs?

Knowing how to answer these questions is a great way to avoid losing control or having to pay the bill in installments.

2- Having a limit that doesn't match your financial reality

Having a high credit card limit is great, but it may not match your financial reality and may be beyond what you can afford right now.

As tempting as it may be to release the balance, try to request a limit that helps you keep your bill payments up to date. Up to 50% of your income is recommended, but consider whether this amount makes sense with your current expenses.

3- Lend your card

If you have everything under control and know how much you can spend, but lend your card to someone, the risk of getting into debt remains high.

Lending your credit card, even to friends or family, is such a common and dangerous practice that we wrote an entire article just to discuss it. Check it out here!

Remember that you don't need to lend your physical card: information such as the card number, security code, and expiration date already guarantees the completion of an online purchase, so don't share it.

4- Delaying payment of the invoice

Whether due to forgetfulness or lack of planning, failing to pay your credit card bill on the due date is dangerous. Even for a short period of time, interest will already be accruing.

5- Not tracking expenses throughout the month

Track your current bill amount daily and understand your expenses.

Sometimes, we might have the false impression that we haven't spent that much in a given month and be surprised by the final bill amount. To avoid this, check your bank's app or website for the amount of your outstanding bill .

How can you use your credit card to your advantage?

Now that you know the causes of debt and the main mistakes people make, it's easier to know how to use your credit card to your advantage, right?

In any case, here are a few more tips:

• If you want to make a purchase and are aware of your budget, you can pay in installments with your credit card, so you don't have to use up all your income in a single month. Convenient, isn't it?
• Take advantage of points and loyalty programs: find out if your card entitles you to these types of programs; often, points allow you to get personal and home items. But be aware, it's worth comparing the annual fee (maintenance fee) of cards that offer this type of reward with those that don't.

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