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The ABCs of Credit Cards

It's difficult to find someone who doesn't have a credit card today. There are all kinds, not only banks, but also supermarkets and pharmacies, among others. In the month of December plastic is especially important, since expenses seem to grow exponentially for Christmas and New Year's, in addition to school purchases, cash advances and the first charges of the holidays.

In December, with Christmas gifts, holidays and school shopping just around the corner, credit cards begin to live their golden age. An expert explains what precautions we should take in order to not use them indiscriminately."Today we are in a society that is purely consumerist and we live in a country where disparity of incomes is very great, and for people who earn very little salary, the only way to meet basic needs or lifestyle is debt," notes the Head of department of Public Accountancy and Auditing at Pacific University, Arturo Farías.

In fact, according to the Association of Banks and Financial Institutions of Chile (ABIF), the number of bank credit cards in force, excluding the cards from commercial houses, is approaching 7 million units. In addition, the institution ensures that bank credit cards are used frequently by 23% of households, while non-bank credit cards (issued mainly by commercial houses and supermarkets) are used by 53% of households.

Because of its widespread use, the Pacific University expert emphasizes a series of points that must be taken into account in order to use the credit card carefully:

  • Check the associated costs: We must analyze how the card is structured, ie, review the maintenance costs, associated insurance such as unforseen circumstances and sometimes unemployment insurance included. These charges will be made every month and must be taken into account.
  • Beware the monthly payment: it is best to have a credit card with a payment structure that allows to use it only as necessary. This is also advisable as an expense control issue, since having multiple cards in practice means that the person has a larger available credit and the question should be asked: "will I be able to respond to all these obligations?". Indebtedness is very easy, since credit is approved.

Having a lot of credit available on different credit cards could cause problems, since when a report is made by the Superintendency of Banks, it shows what your 'real' and 'potential' debt is. For example, if a person owes two million pesos, but has a credit limit of five, in practice he can dispose of the other three without requesting authorization. Under this point of view, the bank or any financial institution is putting a certain degree of risk because of that, since without the bank's knowledge the person can make use of that money. This is increased when they see that the person has several cards and all occupied, even if they are low amounts.

  • Beware of extra fees: The golden rule is that the duration of the debt by acquiring goods is directly related to the time during which such property is used. If you buy something that will last a year, such as a cell phone, the person could pay it without problems in 12 months; But if you buy something that is going to end instantly (like food), it is not advisable to pay for it in twelve installments. It is necessary to calculate the benefits that the goods will give over time, reflecting in the time will be delayed in paying it back. For example, buying a home is made over 30 years, which is not bad, because the house will last that and much more. In short, one has to ask how long one is going to take advantage of that good: if the good has a short term use, the debt would also have to be short term.

On the other hand, in practice and as a cost item, it is better to prefer interest-free installments, because the property itself is paid and not interest, but it must also be taken into account that when using installments on the credit card during all months of the "interest-free installments".

  • Watch revolving interest: The daily interest is that which applies in the event that the person doesn't pay it back within the prescribed period. Therefore, it is a very important point to consider, since that is where the cards start to make money for the issuer. Often the revolving interest is three times the interest they charge monthly.
  • Credit line vs. Credit card: a credit line is credit to be charged for the time period used, either one, two, three days, two months or more. It deals with urgent and/or unforeseen things, because there is interest in each day that is used. Therefore, when you want to buy something and have the capacity and time to plan it, you should prefer to use the credit card or a bank loan.
  • Take advantage of benefits responsibly: Today the use of credit cards is associated with a number of benefits in order to attract customers. It is important to take advantage of them, whether club points or travel kilometers, but do not pay attention to that, rather pay attention to the interest rate or the cost of maintaining that card. At the same time, it is better to have only a single card which gives certain benefits, to order and gather more points, kilometers or whatever.