Do you know that checking the way you pay for your credit card helps you know if you are a prudent user of this banking service or not?
What is the difference in cost between the different ways of paying the card?
The objective of this article is to answer these and other questions that help to understand what happens when we apply any of the payment options, or the cost of each one.
As a user, you have multiple options to pay your credit card. Of all, only one is optimal: pay the entire amount due on the payment deadline or before.
This, because paying on time does not generate any interest and, in addition to using the credit for free, you can take advantage of the loyalty plans of your bank.
In a survey conducted among readers of Argentarium.com, 67% of 580 respondents responded that they pay their card in this way. It is a fairly high proportion, but what about the others? The rest, 33%, are the users that are financed and those who, on this occasion, occupy us most.
Of these, 21.7% responded that in the last six months they have paid a higher proportion than the minimum payment, but not the totality; 7.8% said they have only paid the minimum fee and the rest, 3.28%, said they have stopped paying for lack of liquidity.
In all these cases the debt is accumulated and interest is generated. Let’s look carefully at what happens in each scenario.
You pay everything on your credit card, and on time
If you are in this line, you are a model user. This means that you know with precision the dates of cut and payment of your cards and you are disciplined in the payment, because you make sure to only consume with the card what you have planned and budgeted. Having passed this first test, you must pay attention to other important variables to optimize your score or credit rating. For example, you must ensure that you are not consuming too high a proportion of your credit limit. Alejandro Lender, director of this portal, recommends maintaining a consumption level below 50% of the credit limit.
If you pay more than the minimum of the card, but less than the total
If this is your case, you should evaluate if it is really necessary that you pay halfway and, in case you have the possibility of making your full payment on the payment deadline (or before), it will always be the best option. Otherwise, remember that interest is generated from the date you made the consumption , and that they will be generated anyway when you make your payment.
As a motivating exercise, you can review your account statements for the past few months and add up all the charges generated by interest on financing. The resulting amount is what it is costing you to stop paying your full card.
Anyway, beware of giving us confusion. The fact that interest continues to be generated does not mean that making incomplete payments will be the same as stop paying or make only the minimum payment, since the interest will be charged, in this case, they are lower.
On the other hand, if you maintain the same level of consumption without paying the entire amount due, you could be feeding a snowball and face significant financial problems in the future.
This, not counting the effect that it may have on your credit score or rating, which will be adversely affected to the extent that you are consuming near your approved credit limit, since you will be sending the signal that your financial flexibility is limited.
If I make the minimum payment of my credit card
As indicated above, almost eight out of every one hundred respondents said they have limited themselves to making the minimum payment in recent months. If you are in this situation, you should be clear that – contrary to what many think – making the minimum payment does not avoid interest charges. In fact, this fee is determined or calculated by adding up all the interest generated, the commissions, the charges, a proportion of the amount or capital in force and the total of the due capital.
If the user extends the practice of making only the minimum payment, the sum of the interest he pays can finally be almost as high as the total amount originally consumed.
We illustrate with an example: a user who consumes one hundred pesos of his credit card and decides to make the minimum payment, would pay RD $ 7.8 (considering an annual interest rate of 60%). If due to lack of money or planning this user continues to make the minimum payment indefinitely, it will take 36 months (three years) to pay off the debt of the one hundred pesos that he initially consumed, and he will have paid interest for an amount of RD $ 92.5, for a payment total of RD $ 192.5.
As can be seen, this form of financing is highly costly and is not a reasonable option, if it can be avoided, especially considering that there are alternatives in the market that are one third expensive.
If I stop paying my credit card
Of all, this is the worst option, both for its economic cost and for its negative impact on the user’s credit profile that will imply direct and immediate consequences (arrears, surcharges, calls of turbocharges) and indirect, in the sense that they restrict the access to financial and even employment opportunities.
If you made this decision or are thinking of doing so, keep in mind that in the end you will have to pay, in addition to the interest, the late fees contemplated in the signed contract, in addition to legal expenses, etc. And if this practice lasts for a long time, you can end up paying much more than double the amount initially consumed.
In addition, considering this possibility may be an indicator that you are in more serious financial problems than a lack of temporary liquidity. It is important to stop seriously in this regard. If the level of uncertainty about your economic possibilities in the near future is high, consider spending only what you enter. Having your eyes wide open can help detect a debt crisis in time and take steps to discourage it.