Surely you have seen or heard the phrase “buy now and pay later” in a commercial establishment or online store. Today, payment by credit card is quite attractive for buyers, as it is a means to finance their purchases without using cash.
However, using it wisely is not always easy. You need to understand what it is and how it works in order to use it in your favor as a tool that makes it easier for you to control your money. That’s why we want to share everything you need to know before choosing yours.
First of all, what is a credit card?
A credit card is a financial instrument that can be used to acquire goods and services without the need to pay cash in stores or electronic stores.
Credit cards are usually made of plastic and have a standardized size of about 8.5 cm x 5.5 cm worldwide. They can be issued by banks or financial institutions, and unlike debit cards, they allow you to pay in the future.
However, this money must be returned to the bank or financial institution that granted it. This can be done through a full payment after the cut-off date (which is usually every month) or in the long term, through a minimum payment. However, if you decide to pay the minimum amount, you will be charged an interest rate, which we will explain later.
And how do card purchases work?
Purchases by credit card require that the merchant – digital or physical – have an electronic mechanism to send the transaction data and receive payment confirmation.
If the establishment has this mechanism, the card can be inserted in a terminal, where you can enter a personal code. In the event that the terminal is of the “contactless” type, you will only have to support the card in a reader, called a dataphone, and your purchase will be ready.
Once the transaction is completed, the amount of your purchase will be included in your next statement.
However, using a credit card does not require that you have the amount to be paid in your bank account, as with the debit card.
The use of the credit card implies a loan from the entity that granted it to you, which you must pay back at the end of the period or postpone your payment, paying the corresponding interest, which is the extra cost to finance you.
So what are the benefits of having a credit card?
- Security: you do not need to load cash and have financial support in emergency situations.
- Convenience: you can shop online and pay for digital services, such as streaming.
- Control: some cards allow you to control your expenses through an application, which allows you to block it and prevent its use in case of theft or loss.
Do the cards have an expense limit?
Yes, the issuer of the credit card imposes a limit of expenses so that you do not exceed your possibilities. In general, the limit is defined taking into account several factors, such as:
- Your credit history
- The sum of your income.
- If it is your first card.
What are the costs of a credit card?
Most cards have a cost or charge some kind of commission. Therefore, it is important that you verify your contract and read the small letters that usually appear at the end of it. Now, some of the costs and charges that may be charged are:
- Fixed monthly rate or for each time you use it.
- Cash provision (when you withdraw cash at ATMs).
- Inactivity (when you do not use it for a certain period of time).
- Transfer of money to another card.
- Card cancellation.
- Expenses made abroad.
- Direct debit service.
What is the most important factor that I should take into account when choosing a credit card?
When you are in the process of evaluating which card to hire, it is very important that you consider the average CAT (Total Annual Cost).
The CAT is the calculation of the total cost of contracting a credit expressed in percentage terms, which incorporates the interest, commissions and fees that you will eventually have to pay. In the case of credit cards, the CAT serves to clearly see the real cost of financing your card. For example, a card may have low interest but high fees, and the latter can raise the total cost of financing.
Then, before choosing a credit card, ask for the average CAT so you can accurately compare each of the products they are offering.
What is the minimum payment?
The minimum payment is the smallest amount you will have to pay so that your credit remains available in case you cannot pay the total debt at the time of the due date.
Now, paying the minimum is a risk, because if you use this option month by month, the interest will accumulate and the debt to be paid will be greater, even until it becomes unpayable by your own economy.
The interest charged by the cards for a debt is usually high. In Mexico, it can reach up to 70% per year. Because of this, it is very important that you contemplate that the minimum payment will only allow you to keep your credit line active, but you will accumulate debts, since credit cards first charge interest and commissions, and then capital, which is money Borrowed to make your purchases.
What happens if I exceed my monthly card expenses?
The main risk of exceeding your monthly credit card expenses is that you will not be able to pay your statement. Now, if you do not pay the total expenses or pay the minimum, then the card issuer will charge you interest, which will come on your card statement for the following month. In short, your ability to pay is essential when evaluating the hiring of a credit card.
Essentially, you must remember three things:
In summary, credit cards are a good tool to increase your current economic capacity, as long as you can assume the payment of your expenses and the cost of financing them when the account statement arrives.
- To choose a credit card you must be aware of all the charges that will be charged for lending you the money.
- Not all cards have the same rates: see which one best suits your possibilities.
- If you do not pay term, you can end up paying high interest.