The same thing that allows you to make your dreams come true in easy installments can also be the cause of bad debt with its extremely high interest rates. At the end of the day, do credit cards 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 all over the world. It is 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 actually works.
Surprisingly, it works as a form of loan, After all, when we use our cards, we have a period of up to 40 days until we make the payment for what is being purchased. During this period, the banks or financial institutions “loan” us this amount.
When we apply for a card, it always comes with a limit set by the issuing company. This limit is usually released based on your score (credit rating), monthly income, among others… The limit is the amount that will be borrowed for you and represents the maximum amount that can be spent.
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 maximum established value.
For example: If today you have a limit of R$ 800.00 and make a purchase in 4 installments of R$ 200.00, you will have the limit committed to this same purchase for 4 months until the payment is completed.
Therefore, plan the number of installments for your purchases carefully, in case you need to use the limit in the future.
Why do so many people get into trouble with their credit cards?
63% of Brazilian families are in debt at the moment.
Whether due to the crisis or for reasons prior to it, this number scares us even more when we look closely at the cause of the debt: Of these indebted families, 79.8% have credit cards as the cause.
Although it is already very high, this number is on an increasing curve over time: in the same period in 2019, the total number of families in debt due to credit cards was 78.4%.
If your bill doesn't add up at the end of the month, your card bill could be a big suspect, since it's much easier to lose control of your spending by paying in installments than by paying in cash or by debit.
When this happens, the option to split the bill seems very tempting to us and that “pay the minimum bill” button (normally 15% of the total amount due) makes our eyes shine. But it is worth remembering that this is where the famous interest comes in, which revolves around nothing less than 300% per year.
To make matters worse, the average time Brazilian families have been late paying their credit card bills 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 interest rates on the market.
Can you imagine the snowball effect this could have?
What are the most common mistakes when using the card?
1-Not foreseeing expenses within the budget
When we set up our budgets, we know how much the lines “household bills”, “medical expenses”, “education expenses” cost us, but do you have a line just for card expenses?
Going further: today, would you be able to say what the maximum amount that can be spent on your credit card is, without compromising other basic items?
Knowing how to answer these questions is a great way to avoid losing control or having to pay your bill in installments.
2- Having a limit that does not correspond to your financial reality
Having a high limit on your card is nice, but it may not correspond to your financial reality and may be beyond the costs you can afford at the moment.
As tempting as it may be to release your balance, try to request a limit that will help you keep your bills up to date. It is recommended to have up to 50% of your income, but think about 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 you 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 a text just to talk about it. check it out here!
Don't forget that it is not necessary to lend the physical card: data such as card number, security code and expiration date already guarantee the completion of a virtual purchase, so do not share them.
4- Delaying the invoice
Whether it's due to forgetfulness or lack of planning, failing to pay your credit card bill on the due date is dangerous. Even if it's only for a short period of time, interest will already be charged.
5- Not tracking expenses throughout the month
Monitor the current value of your bill daily and find out about your expenses.
Sometimes we may have the false impression that we didn't spend much that month and be surprised by the final amount of the bill. To avoid this, look in your bank's apps or website to see the amount of the bill that is currently being paid. open.
How to use your credit card to your advantage?
Now that you know the causes of debt and the main mistakes made, it's easier to know how to use your card as an ally, right?
In any case, here are some more tips:
- If you want to make a purchase and you know your budget well, you can pay in installments on your card, so as not to compromise your entire income in a single month. Advantageous, right?
- Take advantage of rewards and loyalty programs: find out if your card entitles you to these types of programs. Often, points allow us to buy certain personal and household items. But be careful, it is worth comparing the annual fee (maintenance fee) of cards that offer this type of reward with those that do not.
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