How to use your credit card wisely and avoid revolving credit cards

The credit card is a widely used financial tool, functioning as a payment method that offers convenience and, in many cases, benefits such as points and cashback programs. However, its inappropriate use can lead to a high-cost debt cycle. Understanding how to use your credit card intelligently is essential for financial health, and this essentially involves avoiding the main pitfalls, such as revolving credit. This article will analyze the mechanisms that make credit cards a source of financial risk and present analytical strategies for their sustainable use.

The revolving credit mechanism and its associated costs

Revolving credit is a pre-approved line of financing that is activated when the credit card holder does not pay the invoice in full by the due date. When paying any amount between the minimum and the total, the remaining outstanding balance is automatically financed for the following month, incurring interest.

The main characteristic of the revolving loan is its interest rates, which are among the highest in the consumer credit market in Brazil. The composition of the revolving credit cost includes:

• Remunerative interest: They apply to the unpaid outstanding balance. The fee is defined by the financial institution and must be informed on the invoice. Due to its compound nature (interest on interest), debt growth is exponential.
• Tax on Financial Operations (IOF): It is a federal tax that is levied on the amount financed in the revolving loan.
• Late fine: Applied if the minimum payment is not made by the due date.
• Late payment interest: Charged on the outstanding amount.

Since 2017, regulations from the National Monetary Council (CMN) determine that consumers can only remain on revolving credit for a single bill cycle. After 30 days, the financial institution is obliged to offer an option to pay the outstanding balance in installments with more advantageous, although still high, interest rates.

Main financial pitfalls beyond revolving credit

Credit card debt is not limited to revolving debt. There are other mechanisms and behaviors that represent significant financial risks and that demand attention from the consumer.

• Invoice installments: Although it is a regulated alternative to revolving and with lower interest rates, paying in installments still represents contracting a debt at a cost. Its recurring use indicates a mismatch between income and expenses.
• Withdraw with credit card (cash advance): This operation consists of withdrawing cash using the card limit. Interest rates for this modality are extremely high and apply from the moment of withdrawal, without the grace period that exists for purchases.
• Minimum payment as a habit: Treating the minimum payment as a regular practice is the gateway to over-indebtedness. This conduct masks the real ability to pay and postpones the resolution of the problem, while the debt grows exponentially due to compound interest.
• Using the limit as an extension of income: A common conceptual error is seeing the credit card limit as an integral part of the monthly income. The limit is, in fact, a line of credit that needs to be paid off. Its use to systematically cover current expenses is a strong indicator of budget imbalance.
• Annual fee and service fees: The cost of maintaining a card, the annual fee, can impact the budget. It is crucial to analyze the Total Effective Cost (CET) of the card, comparing the benefits offered (miles, cashback) with the associated costs to determine its viability.

Strategies for intelligent and sustainable use of credit cards

Using a credit card as an ally in financial planning, and not as an adversary, depends on the adoption of conscious and disciplined practices. The main objective is to enjoy its convenience without incurring financing costs.

The fundamental strategy is to pay the invoice in full by the due date. This is the only way to completely avoid incurring interest on purchases made. For this to be possible, it is imperative that spending on the card is aligned with the personal or family budget, treating it as a substitute for cash or debt, and not as an additional source of resources.

Other practices include concentrating spending on the card to maximize benefits such as points or cashback, as long as these expenses were already foreseen in the budget. Choosing a card with an annual fee compatible with your usage profile or even opting for cards with no annual fee is also a strategic decision. Finally, constant monitoring of expenses, through applications and alerts, allows strict control and avoids surprises when closing the invoice.

The credit card is a double-sided tool: its usefulness is directly proportional to the user’s financial discipline. Analysis of its cost mechanisms, such as revolving credit and invoice installments, reveals that the smartest way to use it is as a means of payment, always paying off the total balance. Understanding the contractual terms, the fees involved and the Total Effective Cost (CET) is not optional, but an essential responsibility for any consumer who wishes to maintain financial health and avoid the pitfalls of easy credit.