Credit has shown historical growth rates in our country in recent years. It is one of the pillars of the current capitalist economic development model, where its expansion allows people to consume more products and services, generating an increase in production in companies and a consequent increase in the level of employment and income… and more credit and more production. and more income and more credit … and so the cycle goes on. Obviously, this can only be sustained by the country continued economic growth.
However, knowing how to use credit lines can make a big difference between personal financial success and failure.
For the financial market, the cost of credit interest goes, among other things, hand in hand with the risk that the borrower has of not honoring with its commitment. It is important to note that this risk is not only assessed in terms of character. This is undoubtedly one of the items, but it is not the only one. Some banks use 7 risk assessment factors when granting credit. A person who has a highly dangerous profession, for example, may have excellent character, be financially organized, but if he is at risk of death in his professional activity, he may leave a hole for the bank in the event of death.
And why are interest rates so different across credit lines?
In addition to the aspects that influence risk, there is a component related to the urgency of credit. And this urgency is evidenced precisely in the way in which a person contracts a credit line, which can represent more or less risk. An organized and rational person uses cheaper lines of credit, as it is planned for that. A financially disorganized person usually spends a lot of money on interest.
The credit card is a line of credit that can be the cheapest and also the most expensive for the consumer. If the user uses his card limit and pays his bill in full on the due date, it will be the cheapest. In this case, he is demonstrating that he is financially organized and fulfilling his commitment and that is why he has this credit line totally WITHOUT INTEREST.
Direct consumer credit (CDC)
CDCs may have varying interest rates. Payroll-deductible CDCs, for example, represent a good guarantee for banks, as they are discounted on the sheet. Thus, an eventual financial disorganization of the individual does not compromise the risk of the operation. Other types of CDC, in case of financial uncontrolled or urgent situations of the borrower, may generate default by the bank.
If a customer has two CDC lines available, one with an additional guarantee, which is the discount on the payroll and the other where there is no such guarantee, obviously the second option will have higher interest rates.
Financing is those lines of credit with specific destination, such as vehicle acquisition, property acquisition, computers, construction material and etc. These lines usually have interest rates close to the CDCs and may be slightly lower in some cases. In vehicle financing, for example, the car itself is an additional guarantee of the operation. It is important to stress that it is an additional guarantee and not a unique one. For the bank, it doesn’t matter to have to take the car back, for example. What he wants is to receive the parcels. So what he really assesses is the borrower’s ability to pay according to his income.
The special limit of the current account has the following characteristic: the customer simply withdraws the money from the account, uses it as he wishes and has no provision to return it to the bank. Only interest will be charged while using the money. Obviously, this poses a greater risk to the bank than the previous lines. In this way, interest on that credit will be higher.
Revolving credit card
When a customer makes purchases on the credit card and does not honor the payment of the invoice on the date and in the amount corresponding to the commitment assumed, the risk for the bank becomes extremely high, since there is no established commitment to pay the amount , no there are guarantees of discount on the payroll and the customer, in a way, proved unskillful with his financial control. Obviously the causes of these unforeseen events can be diverse, but in all of them the risk is higher. In addition, the bank WILL HAVE to pay the sales value of the products to the stores where the customer consumed, IMPRETERIVELY. Therefore, the interest rate of the credit card revolving is the highest in the market.
Adapting the need to the credit line
If I intend to purchase a car, the ideal thing is that I seek vehicle financing and not the overdraft or a CDC. It may be that, if I have two lines at my disposal to compare, probably, in this case, the comparison will be between the consigned CDC and the vehicle financing. If I do not have the CDC on record, the vehicle financing rate will certainly be the most appropriate.
If I plan to purchase a television, I can use the CDC. Or installments without interest on the card, as long as I pay strictly on the date. But I must not use the overdraft.
The overdraft and revolving credit card should only be used when the individual DOES NOT have any other line of credit available at that exact moment and in situations of extreme urgency, and must pay it in the LESS TIME POSSIBLE. There may be an urgent situation on a weekend, when it is necessary to use the overdraft and it would not be possible to study a CDC. The right thing to do in these cases is, at the first opportunity, to pay the overdraft, EVEN IF THE CUSTOMER RECOURES THE CDC.