Credit Card Interest Rates: How They Work and What to Watch Out For

Credit card interest rates can be dangerous if you don't have good financial planning.

After all, whenever you delay paying your bill or pay only the minimum amount, interest starts to accrue.

In Brazil, the interest rate on credit cards is very high, reaching more than 350% per year. 

For comparison purposes, in other South American countries, such as Peru, Chile and Colombia, for example, this value does not exceed 50%. 

What are credit card interest rates?

Credit card interest is the fee charged by financial institutions when you fail to pay your bill on time.

This rate is basically an amount that banks charge for giving you the right to extend the payment of your invoice.

Let's say you only owe part of the installment in a given month. Is it possible to pay just a small amount and save the rest for future months?

The answer is yes. However, if you don't pay off your entire debt and it remains outstanding, you'll be charged interest on the remaining amount.

How do interest rates work?

Your credit card bill works like a cycle. So, you have a monthly spending limit and a bill due date. Every month, it's the same.

However, unforeseen events do occur and you may not be able to pay the full amount of your bill in a given month.

In this case, you can make the minimum payment on the invoice and enter into the so-called Revolving Credit or even pay the amount of your invoice in installments. 

Previously, the Central Bank set the minimum invoice amount at R$151.00. If you owed R$1,000 on your credit card, for example, you could only pay R$150.00.

However, this rule changed in 2018. Since then, the minimum invoice amount has been set by each financial institution. 

Therefore, it can be 10, 20, 30%… Each institution has its own rule.

Understand Revolving Credit and its rules

Revolving credit automatically becomes valid when you choose to pay any amount between the minimum amount on your bill and the total amount.

Let's take this same value of R$ 1000, which we mentioned above, for a clearer example of revolving credit.

Let's say you're going to make the minimum payment, which is 20% of revolving interest, according to your bank. 

So, you will pay R$ 200 and will have a debt of R$ 800 that will be added to your next bill, plus late payment fees, interest and IOF.

Before 2018, you could pay the minimum amount on your bill, and the credit card interest rates on your revolving credit balance would increase. However, this made it very easy to get overwhelmed and into debt.

Therefore, the Central Bank established that revolving interest on the card must be charged within 30 days. 

After this period, if you do not make the payment, your bill will be paid in installments and you must pay the amount stipulated by the card issuer.

Installment

With the new BC rules, financial institutions are required to show the minimum installment amount on their own invoices.

Therefore, if you pay the EXACT amount stipulated in installments, the bank understands that you want to pay the amount in installments.

Let's say the amount shown on your installment bill is R$$64.85. If you pay exactly this amount, the installment payment will be debited from your account in the coming months.

What is Total Effective Cost?

The Total Effective Cost (CET) is the total sum of the value of your invoice, plus interest, fines and charges at the end of the entire process.

You can calculate the APR for installments and revolving credit and analyze which one is more worthwhile.

But the truth is that your choice will depend on how much you actually have to pay off your bill.

How is credit card interest calculated?

Let's go back to the example of the R$ 1000 invoice, with the credit card interest rate at R$20%. Remember that the outstanding balance on the invoice is R$ 800, right?

So the calculation is as follows:

Outstanding balance: R$ 800

Revolving interest rate: (R$ 800 x 20%) = R$ 160

Fine of 2%: R$ 20

Mora from 1%: R$ 10

R$800 + R$160 + R$20 + R$10 = R$990

Remember that:

• instead of 20%, you will enter the interest rate charged by your bank, which varies for each institution;
• the delay is proportional to the value of days of delay.

What precautions should I take with credit card interest rates?

We've put together some tips on the subject. Check it out!

• When spending on credit, take into account your credit limit and not what is offered by the bank;
• Whenever possible, pay your bill in full. This way, you avoid paying interest and fines;
• Obtain credit in other ways, such as personal credit, for example, may be more advantageous than paying in installments or using a revolving interest rate. Analyze other credit options and negotiate your debt!
• If you've chosen the installment plan, be sure to pay your bills regularly. Otherwise, you may not only owe money but also have your credit rating negatively impacted.
• Don't forget to add your debt from the previous month to your expenses for the next month, otherwise you might get into the famous snowball situation and lose track of your bills.

Count on ConsultaCred to help you find the best credit cards!

Conclusion

We already know that it is best not to depend on interest rates. credit card and try to always pay the bill in full.

If this is not possible, put your expenses on paper and try to resolve the situation without compromising your remaining income. Even if this means acquiring credit with lower interest rates.

Remember that as tempting as it may be to just pay the minimum amount on your bill, the total amount of your debt will be higher at the end of the installment plan.

So, do you have any questions about credit card interest rates? Leave a comment!