2024-08-26 22:17:16
Read a customer testimonial that shows how paying only the minimum on your credit card can impact your finances. A guide on how to deal with it.
The USD 700 a month that María (name changed) paid on her credit card each month turned into a debt of USD 2,800 in just a few months, which she now does not know how to pay.
How did she get into this situation? Maria earns a salary of USD 1,500 a month and also received USD 400 for extra classes she taught at the university, so at the end of the month she received USD 1,900 a month.
But misusing his card has led him to go into debt beyond what he could really afford, he admits. Now he fears falling into default.
Although experts recommend only committing 40% of your salary to paying off debts, she exceeded that limit.
She used her card to pay for clothes, appliances, dental treatments, to cover part of her mother’s medical treatment, and even grocery shopping, taxes, car insurance and more.
With all this, in just a few months he had accumulated a debt of USD 5,800 in total. At first he remembers that he deferred his card purchases for three months, so that he could pay off the debt quickly. As the payment increased, he opted to defer his purchases for longer periods, 12 months.
Until mid-June 2023, the monthly fee he paid was between USD 600 and USD 700. But in January 2024, the fee had already reached between USD 1,300 and USD 1,400 per month, which he “barely paid.” With that, he had between USD 600 and USD 500 left for his rent, food, basic services and gasoline expenses.
But in March 2024, things got complicated when the university stopped hiring her to teach classes. Suddenly, her income dropped to $1,500. That left her with less money to pay on the card, so she opted to pay the minimum and sometimes a little more.
In April, she received a statement for USD 1,800. In May, she was unable to pay the full amount, and received a payment of USD 2,300. In June, she only paid the minimum and in July she has to pay USD 2,800. She says she does not have those resources.
As of July 2024, your total debt is USD 5,800 per month.
The origin of the problem
César Coronel Garcés, a lawyer for Defensa Deudores Ecuador, says that the use of credit cards must respond to the economic reality of the consumer.
The first thing to know is that a person can only commit up to 40% of their monthly income to pay off debts. Even committing 25% of their income to pay off debts is already a yellow light indicating that they are approaching the debt limit, says Coronel.
What does this mean? In Maria’s case, her income of USD 1,900 per month only allowed her to borrow up to a maximum of USD 760 per month, which represents 40% of her income. But her debt grew to USD 1,300 per month, or 70% of her salary. This means that she is over-indebted.
Another problem is that Ecuadorians do not pay for perishable goods such as groceries or basic services in a month. According to the latest World Bank study, 52% of Ecuadorians defer their grocery purchases with a credit card, even though they are perishable goods, says Coronel.
All of these misuses ultimately lead to people paying the minimum, which becomes a snowball.
What is the minimum payment?
What is the minimum payment? The minimum payment is the lowest amount that a bank will accept from a customer so that they do not fall into default. There is no precise formula and it depends on each financial institution.
Banks warn customers that if they only make the minimum payment each period, they will have to pay more interest and it will take longer to pay off their balance.
In Maria’s case, if she continues paying only the minimum, it will take her 2.3 years to pay off her debt, assuming she does not use the credit card again, and she will end up paying about $400 in interest.
And what’s worse, says Coronel, people keep using their cards, so the value keeps increasing every month, creating an unpayable snowball.
To avoid these problems, Coronel suggests that customers ask themselves before making a purchase with a credit card:
Do I really need what I’m going to buy?
If you really need to make the purchase, you should ask yourself: Will I be able to pay it off until the end of the month or do I need to defer it? There are establishments that allow you to defer purchases for up to 12 months.
What options does Maria have?
What options does Maria have? One option is to request a refinancing of the debt. However, banks usually refinance the entire value of the debt, including the deferred amounts with interest and not just the unpaid revolving balance, which will increase the amount she has to pay.
However, Coronel explains that clients can negotiate with financial institutions the payment of interest in special cases, for example, when their ability to pay has been affected by illness.
According to Coronel, the Monetary Code states that the client has the right to make capital payments and access a new amortization table. If a bank refuses, the expert suggests that the client go to the Customer Ombudsman (find the list here), which, by law, each financial institution has.
In any case, the expert says that refinancing the debt is an extreme measure, so he suggests cancelling the credit card.
Another option is to seek additional income, which may seem like a complicated option, but Coronel says that social networks now offer many business alternatives.
Ecuador, the country where people prefer to pay only the minimum
The Global Findex report highlights that 60% of Ecuadorians with a card pay their entire bill. The remaining 40% pay the minimum fee or only part of the total amount to be paid in the month.
Ecuador is the South American nation with the lowest percentage of people who pay their bills in full.
Meanwhile, Uruguay is the country with the most people who pay the full monthly fee on their credit card, with 82% of the population.
By: PRIMICIAS