Understanding Credit Card Interests and Their Impact on Your Finances
Credit cards can be a valuable tool for managing your personal finances, but they can also become a significant burden if you spend recklessly and only pay the minimum amount required by financial institutions.
Digitt, a Mexican fintech company, warns that “paying just the minimum is the quickest way to fall into debt.” This issue stems from the fact that 13.9% of users generate interest and are unaware of the rates charged to them.
Luis Rubén Chávez, CEO of a Mexican online lending platform, explains that “banks’ business model revolves around charging interest. This keeps people indebted, hooked on a product that can charge up to 150% annually. This debt can extend for years without users seeing an exit.”
In some cases, interest rates are so high that they represent more than 50% of the total debt users owe to financial institutions.
The Long Road to Debt Repayment
While paying the minimum required amount maintains a healthy credit history, it’s not an ideal practice. The smaller your payments, the longer it will take to pay off your debt, as interest accumulates and increases the final amount owed.
The Condusef (National Commission for the Protection and Defense of Financial Services Users) explains that paying only the minimum required amount will keep your credit line current but makes the debt repayment process extremely slow. Interest, fees, and even IVA are prioritized over capital—the amount your financial institution initially lent you.
To illustrate, consider a classic credit card with a limit of 28,000 pesos. If you have a balance of 12,000 pesos at the end of the month with a 30% annual interest rate, your minimum payment would be 350 pesos, and it would take five years and eleven months to pay off the debt. The total amount due would be 27,254.14 pesos, which is 2.27 times the original debt.
However, if you pay double the minimum (700 pesos), it would take only one year and eleven months to clear the debt, requiring only 1.37 times the original amount owed.
Condusef’s Advice for Healthy Financial Habits
To avoid damaging your finances, the Condusef offers these tips:
- Identify the specific information in your credit report to understand the time and high cost associated with making small payments.
- Consider paying the minimum only in exceptional circumstances or emergencies.
- If you frequently pay the minimum, look for a fixed-rate credit product with a set term to pay off your entire credit card balance and cancel it.
- Evaluate whether your current line of credit is necessary and if you can afford the payments. Remember that you can request a reduction.
Key Questions and Answers
- What is the impact of only paying the minimum on credit cards? Paying just the minimum keeps your credit line current but significantly extends the time to pay off your debt due to accruing interest.
- How do high-interest rates affect users? Interest rates can represent more than 50% of the total debt, keeping users indebted for years.
- What advice does Condusef provide to maintain healthy finances? Identify your credit report details, consider minimum payments for exceptions, seek fixed-rate credits to pay off balances, and evaluate your credit line needs.
