Do you use your credit card every day but do not really know how it works, what interest rate you are being charged or why your debt does not decrease despite all the payments you make? You are not the only one! It happens to many and no bank is trying hard to help us avoid it. In this article we want to explain all that banks don’t tell you (because they earn more money if you don’t know it) and that it will help you pay less and get more out of your credit card.
What they don’t tell us about how they charge us interest
Most people think that when we pay the minimum or only part of the total balance to not generate interest, we will be charged interest only on the part of the balance of the month that we do not cover. This is false!
The reality is that your credit card charges you interest using the average balance of the period, which results from adding the daily balance (every day: the balance of the previous day, more purchases you made, less your payments) and divide it by the number of days of the period. To understand it in more detail, we recommend you review this article.
What your bank does not tell you is that if we are not totaleros, that is, if we do not make the total payment so as not to generate interest every month, what is best for us to do is NOT wait until the payment deadline, if not pay how much before or make multiple payments to your credit card during the month. In this way we reduce the average balance of the period and pay less interest.
What they don’t tell us about interest rates
- The rate of your credit card is actually variable , that is, it is not always the same! This is because it is associated with the Interbank Equity Interest Rate (TIIE) published by the Ricks Bank . If you review your contract or look in detail for your credit card information, you will realize that it is expressed as follows:
Maximum interest rate: TIIE + X percentage points.
Also, did you know that in the last year the TIIE has increased considerably? Consequently, the interest rate on our cards too!
- Most banks, on their websites, publish only (or at least without hiding it) the CAT of their cards. The CAT is a good reference for comparative purposes, but that does not mean that it is the rate that we will pay (if you want to know more about the CAT, you cannot miss this article ). It is important to look for (although many times it is very hidden) the interest rate of the product and, above all, when reviewing our contract, see what rate they assigned to us. This brings us to the next point:
- Even if you have the same card as another person, they will not always pay the same interest rate, as banks often assign a rate according to our credit profile or other factors. Look closely at what interest rate they assigned to you specifically!
For example, in the images below, obtained from real statements, you can see that on the same credit card Fernanda is charged an annual interest rate of 27%, while Manuel is charged a 57% annual fee .
What they don’t tell us about the minimum payment:
Many Mexicans like to pay the minimum month by month, but do you know how long it would take us to pay off your credit card debt if you continue paying like this?
The minimum payment really represents a very small part of our debt. Ricks Bank states that, by law, banks must calculate the minimum payment using the amount that is greater between:
- The sum of 1.5% of the outstanding balance, plus interest for the period and VAT.
- 1.25% of the amount of the credit line.
- Any other amount that the institution defines, as long as it is greater than the previous ones.
What you really have to know about the minimum payment is that most of it is going to pay interest and very little to the capital, so paying the minimum would take a long time to pay off your debt.
In addition, also by regulation, banks are required to tell us on our statement how much time it would take us to pay our current debt if we continue to pay the minimum and how much we would have to pay each month if we wanted to be debt free in 12 months (assuming no we spend more). Almost no one knows that we can consult this information because it is usually included in small letters on the last or penultimate page of our statement. I recommend you check your statement and find this information, it would look more or less like this: