Making purchases on a credit card has many advantages and is not difficult at all. You just need to keep an eye out not to delay paying the bill and paying interest. That’s because these small extra costs can occupy the card’s limit, which is released every month after you pay the bill.
Before explaining everything about how credit card installment works and showing the advantages it can bring to your financial life, it is important to bring alert data. The credit card represents one of the main sources of debt for the Brazilian family.
This is what the Consumer Indebtedness and Default Survey (Pic) shows, carried out by the National Confederation of Commerce in Goods, Services and Tourism (CNC) and which analyzed the period of 2021. In that year, the average indebtedness level was the highest in 11 years, reaching 70.9% of Brazilian families.
According to the survey, as highlighted by CNN Brasil, the use of the card will reach 82.6% in 2021. In addition to having the highest historical average, it represents the main type of indebtedness.
The lack of control in installments and a limit greater than your financial budget can afford are the reasons that lead to credit card indebtedness. But don’t worry, if you have questions about the topic, be sure to read our section on debt.
Our contents bring essential tips and help you to have a more organized financial life. Are you interested in finding out more? Keep reading to the end and check it out!
How does credit card payment work?
Another point that can help is to better understand how master card installments work in order to make better decisions and choose, for example, whether it is better to pay with credit or debit. Credit card payment in installments is a way to pay a purchase on time using the limit given by the card issuer.
For example, imagine that you are going to buy an air conditioner whose total value is R$ 2 thousand. The store allows the customer to pay this price in 10 interest-free installments. When paying for air conditioning, the cashier asks you, “credit or debit?”. When choosing credit, within the store’s policies, it can offer payment in up to 10 interest-free installments.
You decide installments in 5 installments on your bank’s credit card, which gave you a limit of R$ 5 thousand. In the next invoice, the first installment of the air conditioning will come in the amount of R$ 400. And so it will be for the next five months.
The payment of BRL 2,000 was paid in installments by your credit card issuer, which is responsible for transferring the money to the store.
How does the installment credit card limit work?
Although you will pay the air conditioning value in these five months, the R$ 2 thousand reais of your limit will be “imprisoned.” In other words, the card issuer will not only “discount” the amount of the portion of its limit but the total purchase. Therefore, it is important to be aware of large-value purchases that can take up a lot of your card.
In our example, if you haven’t made any other purchases on that invoice and you haven’t purchased in installments before, your current limit would be BRL 3,000 (BRL 5,000 minus the BRL 2,000 for the air conditioning purchase). Thus, when seeking to know how credit card installments work, the limit is a factor to be considered in installment purchases.
Many people end up using the entire amount of credit released by the card issuer and ask for an increase in the limit without first analyzing whether their budget can afford the amount. Think that if your limit is R$5,000, you may have an invoice for that amount if you accumulate installments from previous purchases.
The limit value is reset as the next invoices are paid. For example, when paying an invoice for R$400, this amount returns to your limit.
Purchases in installments or subscription services?
That way, the total amount of purchase will be taken from your credit card limit and not just the amount of that month’s installment. It works differently from subscription services paid by credit card.
Netflix and Spotify’s monthly plan are examples. The amount is deducted month by month from the limit of your card but does not occupy the amount of the next months. Let’s assume you decide to buy your gym’s monthly plan, which costs R$200 reais. You register your card as a means of payment.
And monthly, this amount will be charged on the invoice. So, every month you need to ensure that you have at least BRL 200 of limit available on your card. Now, let’s assume that your gym has an annual plan in the total amount of R$ 1800. Divided by 12, the installment would come out to R$ 150 reais.
You can pay in installments, but you will have to “spend” the R$ 1800 on your card at the time of registration. In this case, the purchase is not by subscription but a term purchase.
That is, BRL 1800 will be deducted from your credit card limit when you register, and not just the BRL 200 for the monthly plan, and a BRL 180 installment will appear on your bill for the next 12 months.
Does a credit card purchase in installments have interest?
In all the examples mentioned above, the purchase in installments will only bear interest at the time of payment if this is a policy of the establishment or if the card issuer charges interest for purchases in installments above a certain number of installments.
Surely you’ve been through a situation in which the attendant tells you that term purchases have an interest or that they have interest from a certain number of installments.
In the case of the purchase of air conditioning, for example, a store could say that the purchase on the credit card in one installment (paying the R$ 2 thousand in full on the next invoice) would not have interest, but that from installments in 2 installments an interest rate would be added.
Or even that the installment in 10 installments would not have any interest or that the interest-free amount would only be available for purchases made in debt. In this way, it is possible to make purchases in installments without paying interest as long as the establishment gives this option. Thus, you will not always pay interest on credit card purchases.
How does interest-bearing credit card installment work?
Attention! We are only talking about interest at the time of installment. You will pay interest if you are late paying your credit card bill, regardless of whether you made purchases in installments or not that month.
So we have the following scenarios where you can pay interest when using a credit card:
- Pay interest to the establishment of the purchase if it does not give the option to pay interest-free on the card.
- Pay interest to the credit card issuer for late billing.
- Pay interest to the credit card issuer if the installment is above the quotas (installments) allowed, as some issuers issue cards with an interest-free installment limit.
So, you will not pay interest to the credit card issuer simply for making purchases in installments but for delaying the payment of the invoice or installments above the limit of interest-free quotas.
Is it better to pay in cash or in installments?
Now that you know how credit card installments work and you know that it is possible to pay in installments without paying interest, you may be wondering if it is not more advantageous to pay in installments than to pay in cash. Here it is important to remember that these choices depend a lot on the financial situation of each one.
For example, paying in installments can feel like a way out when you don’t have the full value of the item you want to buy right now. However, this is an indication that you could not actually pay for that item without borrowing money from the card issuer. What if something unexpected happens and you can’t pay the bill?
On the other hand, you may have the amount saved or saved up to pay for the item over a period of time. In this case, you could pay in installments and leave the amount saved, withdrawing an amount each month to pay the bill. Even in the same situation, the installment plan may not be advantageous if you get a discount for paying in cash.
In this case, it is worth it if you negotiate and the store presents you with the possibility of paying a lower or more interesting amount compared to the income you would have if you left the money invested.
In other situations, installment payments can cover major spending emergencies for which you don’t have a reserve. Outside of this case, it is always important to consider that installment is an option when the amount fits into your personal budget, as the card limit is often greater than you can afford.
Debit or credit? Which option is more advantageous?
In addition to questioning whether it is better to pay in installments or not on the card, it is also interesting that you evaluate when it is more advantageous to pay with debit and credit. Concentrating expenses on the same credit card can be interesting if you are financially organized and track your expenses throughout the month.
In this case, it is possible to establish a monthly budget for the expenses that will be paid in credit. As the card has an expiry date, you will be able to pay them in one go. Thus, it is possible to leave the money that would be used for each debit payment.
On the other hand, if you have no control and have a limit much greater than your financial capacity, in addition to opting for debit, it is interesting to review the amount and even ask the finance company to reduce your credit.
Paying on credit without paying in installments but splitting the bill is worth it?
No. Installing the invoice as a way of escaping the interest paid in installments at the purchase establishment is not worth it. That’s because, ideally, paying interest on your credit card is only an option when you have no other source of credit to turn to in an emergency.
Read this other blog article and understand why credit card installment is a problem.
In general, the installment of the invoice should not be seen as a way to acquire goods or pay for superfluous expenses. It is a more advantageous option in case you have lost control of your expenses and do not have the money to pay the amount for that month compared to paying the minimum amount of the invoice.
When paying the invoice in installments directly with the bank, you have the option of negotiating the interest amount for that situation, already determining a time to settle the debt. In the case of the minimum payment, you don’t know exactly when that snowball will end, as you can find yourself again without money and having to pay the minimum of the other invoice and so on.
In addition to the issue of negotiation and the establishment of a deadline for payment of the debt, in the installment of the invoice, you have fixed interest and will not have to pay as high interest as the revolving card (the fee that affects the minimum payment).
What is credit card revolving?
According to the Central Bank of Brazil (BC), the revolving credit card is “a type of credit to finance the credit card bill, with no defined date and installments for payment by the customer, granted when there is paid less than the total amount. Of the invoice, but higher than the agreed monthly minimum”.
Thus, by paying the minimum amount of the invoice, you enter the revolving credit. Since 2017, the BC has established that the maximum term for using this credit is until the next invoice. After that, you must pay the amount with your money or use another credit method from the card-issuing institution.
The revolving credit card is one of the major reasons for indebtedness among Brazilians. The situation is even worse because this type of credit has one of the highest interest rates on the market, competing for side by side with overdraft – another line of credit widely used in the country.
Read the CashMe article that explains what revolving credit is and learn all about this interest rate!
Both revolving and overdraft checks are among the main sources of indebtedness because they are easy to access, are available to the consumer, or are already pre-approved in the current account.
BBC Brasil highlights that the average interest on the credit card revolving was 346.1% per year in November 2021. The report brings a comparison: after a year, a debt of R$ 1 thousand would be in R$ 4,461.
What happens when the credit card installment is not paid?
Thus, when a credit card installment is not paid in its minimum amount, a default situation is configured. What happens thereafter is subject to the contract signed between you and the card issuer.
However, some situations are expected, such as card cancellation, registration of your name with a credit protection agency (such as SPC and Serasa), and, according to the BC, charges such as:
- compensatory interest per day late. It can be calculated on the overdue installment or on the outstanding debt balance;
- traffic ticket;
- late payment interest.
Remember that remuneratory interest can only be charged as agreed in the contract. According to the Central Bank of Brazil, the rate used must be:
- the fee related to the installment operation for the amounts associated with installment operations of the debit balance of the invoice contracted after the customer remains 30 days in the revolving contract;
- The revolving credit rate for other amounts is in arrears.
Lots of fees, right? In addition to a financial problem, which can snowball, failing to pay the credit card installment can give you a lot of headaches, leaving your name negative and decreasing market confidence when evaluating your financing requests, loans, and new cards.
How to negotiate credit card debt?
From there, it is important that you look for ways to reduce the interest rate, which can be abusive in some cases, in order to reduce the amount of credit card debt. And don’t be fooled: it is possible to exchange an expensive debt for a cheaper one.
Here on the CashMe blog, we have a special article on debt negotiation that teaches the step by step of this journey in the main banks. But, in general, you can start this conversation in call centers, on the internet, on internet banking applications, on fairs such as Serasa, and through the card issuer’s WhatsApp.
Usually, the creditor already has a proposal ready for your situation and with more attractive interest. Still, don’t go with the first offer. Analyze, see if you can afford it, and, being realistic, propose a new value if you think it’s appropriate or understand that that amount still doesn’t fit in your budget.
The important thing is not to accept a deal if you already know you won’t be able to pay or start paying without having tried to negotiate a lower interest rate. Do the calculations, try to talk to the creditor again and, if possible, wait for a new contact. It is normal that some attempts are made until the negotiation reaches an agreement that is good for both sides.
When to anticipate payment of the credit card installment?
In the process of understanding how credit card installments work, you have already understood that the total of purchases in installments will occupy your limit and not just the amount of the installment. Over the months, it is possible that you use up your entire limit, and the card issuer no longer grants credit.
In this situation, it is possible to release the credit card limit when paying the invoice in advance. That is, you will pay a certain amount before the due date of that month. Of course, this process is recommended when you have this money left and, in addition to it, the value of the new purchase you want to make.
It is worth scheduling and checking with the card issuer how long it takes for the limit to be released after payment. In general, it happens a few hours after the financial transaction. This way, you can schedule yourself for an emergency purchase and have the credit at your disposal until the next invoice or while your limit is not increased.
Conclusion
Knowing how credit card installment works is an important step in your financial education and can help you not to get into debt. In this article, we saw that with it, it is possible to pay the amount of a purchase month by month, occupying the limit with the total price of the expense and paying off the installments with each new invoice.
You also saw that you could pay in installments without interest if the establishment offers installment purchases under these conditions and if the number of installments requested does not exceed the number that the credit card issuer allows for interest-free installments. On the other hand, interest and other charges will be charged if the invoice is not paid on time.
In the case of payment of the minimum amount, you will enter the credit card revolving. In most cases, it is better to pay the bill in installments directly with the card issuer than to be subject to this fee, which is the highest in the credit market. In any case, the most important step to avoid card debt is to pay your bill on time.
Do you understand how credit card installment works but want a higher limit and a lower interest rate? A loan with a property guarantee is an option for those people who have property of their own. Here at CashMe, it is possible to get from R$50,000 to R$15 million in credit, with 240 months to pay. Run a simulation!
