Revolving credit is an option provided by financial institutions to credit card customers so that they pay only a portion of the monthly invoice amount. In other words: instead of paying it off, the customer leaves the outstanding debt for the next invoice.
Not always, our financial planning responds as expected. Extra expenses, lack of discipline and a number of other reasons can make us spend more than our income allows.
For that reason, the credit card is such a usable payment method in the country. But it is precisely he who can cause the need to use the revolving credit if we don't handle expenses well.
Although practical and immediate, this credit line involves very high interest rates that can complicate your financial health. Therefore, we will see in this post what is hidden behind the decision to apply for revolving credit. Check out!
What is revolving credit?
Revolving credit is an option provided by financial institutions to their credit card customers, where they pay only a portion of the monthly bill. In other words: instead of paying it off, the individual leaves the outstanding debt for the next bill.
But it’s not just that: in addition to the outstanding debt on the last invoice, interest is added. They may vary between institutions and the installment payments made, but it is worth mentioning that these rates are between the highest in the financial market.
Something capable of equaling, even, with the exaggerated values of the overdraft.
Revolving credit: how does it work?
Keep an eye on some of the main features of revolving credit:
- after the request, the borrower undergoes a credit analysis. With this, the institution aims to protect itself and make sure that the applicant can assume the commitment and pay the outstanding amounts.
- The funds can be used or withdrawn within a pre-approved limit by the financial institution itself;
- this revolving credit amount may fluctuate (more or less) as the money is used and paid off;
- revolving credit can be used repeatedly, according to the customer's needs;
- the borrower can even pay the debt in installments, but this causes more interest and, also, the obligation to make a minimum payment of the invoice.
So, only when applying for revolving credit, will the individual have the calculated fees and charges based on the decision taken to pay the invoice.
How to access revolving credit?
The person who is interested in making use of the revolving credit in an emergency must first request it directly from the financial institution through its customer service channels.
Then, the aforementioned credit analysis will take place, made by the institution of which you are an account holder and, thus, a limit for the card will be established.
With that, it remains to know when to use it as soon as you realize the difficulty in paying off your credit card bill.
What are the risks associated with revolving credit?
We have already pointed out that revolving credit should only be used as a emergency and urgency mechanism if the invoice cannot be paid in any way in that month.
No wonder, it is essential that you know and understand what your credit card limits are. Exceeding it prevents you from using it for new purchases, not to mention that it can make your bill more expensive to the point of making it necessary to request a revolving credit.
And, as we have already said, this can accumulate for the following invoices, since you will maintain an open debt with the bank. This means that in the future you will have your purchases on the next invoices and also the debit of each installment of the credit card – plus interest and charges.
The result of this is quite evident, isn't it? The increase in debts can become a constant in your routine, continually making it difficult for you to settle it. It is the old “snowball effect”, in which your indebtedness is continuously higher each month.
This is even one of the reasons that most put UK citizens in the queue of countries with the highest number of defaulters – recently, Brazil totaled 63.8 million indebted people.
Therefore, take the risks when applying for revolving credit only if there is no alternative (as long as the fees and charges are less than that option, of course).
How are interest charged on revolving credit?
To make the matter a little more enlightening, we will understand how the rates are calculated and practiced for the consumer who is dependent on revolving credit at some point.
It works as follows: interest will be levied on each portion of the invoice that had the revolving credit used. See with an example:
- let's say you have until the 30th of a month to pay the invoice in the amount of £ 550;
- in it, the minimum payment stipulated by the institution is £ 60;
- this would leave an outstanding balance of £ 490.
This £ 490, therefore, will be added to the interest on revolving credit. It turns out that this rate can reach up to 300% per year. It is, indeed, a figure capable of harming and destroying anyone's financial planning – both in the short, medium and long terms.
We also know what can happen if you are unable to meet financial commitments in the following months, starting with accrued interest and whose situation may evolve so that you have what consult your CPF or CNPJ at Serasa and other credit protection institutions!
What care should the policyholder take?
Now that we have seen the great dangers surrounding the decision to request revolving credit to pay off the credit card bill, are we going to look for alternative solutions?
The main one is, precisely, the practical notions of financial discipline. Through good practices related to the subject, you have within your reach the limits that can be spent on expenses and unforeseen circumstances, without your income being compromised.
In addition, even if you use revolving credit in a time of need, with more financial discipline you understand how to adjust in the following months until you pay off that debt.
Other points that can be considered are:
- loans with friends and family to pay these urgent expenses;
- analysis of your own expenses in order to reduce expenses and have more effective planning;
- avoid splitting the invoice, and do your best to opt for the full invoice payment.
As previously highlighted, revolving credit is not a villain in itself. In an emergency, it is an alternative, but make sure you have covered all the options before assuming the rates and interest rates of this modality, which are, in fact, extremely high.
Also, as a preventive measure, we invite you to check out our article that talks about some tips for control credit card spending style=”font-weight: 400;”>! Leave this reading to start as soon as you finish this article on revolving credit!
When can revolving credit be charged?
Since April 2017, the credit card has undergone reformulations that also impacted revolving credit. Since then, for example, the user can only apply for revolving credit once a month.
This already prevents the accumulation of debts from occurring at once, promoting more security for the borrower.
In addition, the average rate of revolving credit is flexible, changing month by month in disclosure promoted by the Central Bank. It is worth keeping an eye on, if you flirt with the possibility of using it.
Other points that deserve your attention on the topic:
- the minimum payment was around 15% of the total invoice amount. Pay attention, then, to the fact that the financial institution can define this percentage of its customers;
- there is now a regular interest rate. It was mandated for all banks to follow them, but each institution can charge a 2% fine on a complementary basis.
In other words, there are many factors that must be considered before opting for the revolving credit application. O The credit market itself is sprinkling with options that may be less damaging to your income and family budget.
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So let's hear a little bit about your own experiences. If you’ve already used revolving credit or learned effective techniques to avoid it (or even more worthwhile alternatives), share your strategies with us, in the comments field of this post, to expand this important discussion!