It is tempting to go shopping to your heart’s content, even if the account is currently empty. The bill when paying by credit card flutters finally later into the house, if once a month, the expenses are deducted. Especially with payment transactions on the Internet, the credit card is almost indispensable, but now accept almost all shops, the payment by credit card.
No wonder that the easy handling of the credit card leads to a bad awakening for some consumers. Debt accumulates quickly, which can not be easily paid with the monthly salary. We have tips on how the credit card will not become a debt trap.
How credit cards work
In Germany, credit cards are mainly used to collect the payments made with the card up to a monthly fixture date and up to a maximum of an agreed payment limit and debit the total amount from the account in one go. Also very popular are prepaid cards that work on a credit account.
Less common in Germany are the so-called revolving cards, in which the outstanding amount is debited on monthly loan installments, as is customary in the USA, for example.
While in the case of a bankruptcy loan interest is payable directly from the day of the overdraft and the credit is settled until the outstanding amount is paid, credit card providers generally do not charge interest until the amount has been debited.
Risks of credit cards
Not every credit card offers the same risks. Particularly notorious are the so-called revolving cards, while prepaid cards are considered to be relatively low-risk.
The first big risk is the extra credit that a credit card offers. In addition to the current account, the additional availability of a card has the same effect as an extended dispo-frame, the payment is due four weeks later. However, the point is misunderstood that a credit card only facilitate cashless payments, but should not serve as a liquidity extension.
However, those who use this framework to gain additional liquidity will notice how quickly it can become critical. If the checking account is already in minus, if the credit card bill flutters into the house, the dispo frame promptly no longer sufficient to make the open payment.
Repayment in installments
When repaying the loan amount in installments, as offered by some credit card providers, the interest rate should always be considered. Supposedly, the convenient payment in several installments gives some air in the repayment, but overall, the actual loan amount increases rapidly. The interest rates are based on those of the Dispos and can be up to 20 percent of the actual loan amount.
Even hidden costs represent a significant risk dar. Not every provider is reputable, the look in the fine print reveals some significant fees. For example, Vendesol Bank charges a whopping 22.9 percent interest from the moment it leaves the ATM, not just after the end of the billing period.
In addition, some additional benefits such as insurance cost money. Not infrequently these are more expensive than with a separate degree.
The missing overview
There is also a special risk for credit card use for young people who do not yet have sufficient experience. Consumption lures too fast here, while on the other hand, one hardly worries about the repayment and debts.
But even seasoned adults are not sure about always keeping track. A credit card is predestined to do just that and threaten a nasty surprise at the end of the month. Above all, those who use several cards in parallel can quickly accumulate high debts.
Advantages and disadvantages of individual credit card types
Credit card is not equal to credit card. Each type has very different advantages and disadvantages – also with regard to the potential debt trap.
Charge credit cards
Charge cards are the classic credit cards that provide an agreed availability framework for a certain period of time. In this context, the holder of the card can make expenses, which are summed up and usually deducted from the current account once a month.
After payment of the outstanding amount, the disposition frame is completely available again. Interest will not be charged for the duration of the provision, provided the repayment is made in full on the agreed date.
The regular debit and the agreed credit limits limit the debt risk. At most, debts may occur that include the specified monthly availability.
At the same time, the card offers maximum flexibility abroad as there is no limit on a credit balance. If an unforeseen event occurs, the Charge Card usually offers a nest egg.
Although credit card issuers usually replace financial losses on loss if it can be shown that the card was already owned by others at the time of the charge, it is best not to lose the charge card.
Despite the limitation on a certain budget and the monthly debit a debt with the card is possible – especially if the current account is already exhausted and a settlement of the loan amount is not possible.
Prepaid credit cards
A prepaid credit card works in a similar way to a prepaid card for the mobile phone: the owner can only use the card if there is a credit balance on the card.
You can not spend more money than you actually have. The danger of the debt trap does not exist, which is why the prepaid card is also suitable for young people traveling abroad, for example. The parents have the expenditure barrier to control over the finances, at the same time, the teenager can learn how to handle cashless payments.
Even adult travelers benefit from the prepaid card. If the charge card always poses a security risk in the case of loss, this is limited to the amount of the credit in the case of the prepaid card. At the same time, you do not have to give up the freedom of cashless travel.
Another advantage is for people with low or irregular income. These are the access to a credit card by a bad credit rating partially completely denied. However, a prepaid credit card is not tied to an account, credit bureau information is not given before the award.
The prepaid card is hardly different from the classic credit card – except that there is no credit. The cost of taking off at the machine are similar, and the annual fees hardly vary.
Revolving credit cards
Revolving credit cards pose the greatest risk to the debt trap. Providers usually promote this feature with a part-payment feature that is particularly convenient. The cardholder does not pay for the amount of the card used in a single payment, but pays low monthly installments.
While the cards were scarcely common in Germany for a long time, numerous companies such as Postbank, Targobank, Commerzbank and Landesbank Berlin now offer cards with a partial payment function.
The advantage is certainly the lower monthly burden, which results from dividing the total to several months.
The revolving cards usually incur high costs due to the interest incurred when using the installment payment function. Not infrequently, these are still above the interest rates for syndicated loans, 15 or even 20 percent per annum are not uncommon.
Example: If you use a credit line of 1,500 euros at an interest rate of 18 percent with a minimum rate of two percent of the balance, you have paid after one year 350.26 euros to the provider in monthly installments. Of this, however, 262.70 euros interest, while the debt has fallen only by 87.57 euros.
Another disadvantage is the lack of clarity, which is exacerbated if the card is used even with existing installments more and more. Thus, the monthly rate increases, the financial burden increases in the worst case until the claims can no longer be settled.
What is often not considered: installment payments are usually associated with an entry in the credit bureau – your own credit rating drops. Basically, although every credit card is noted in the credit bureau, so that one drives better to have only one, in the revolving card, the Teilzahlungsfunktion affects in addition, however, a negative.
The biggest risk for a debt trap is the so-called revolving credit card, in which open amounts are paid only by installments. This carries the risk of high interest rates. At the same time, one should be aware that the installment payment has an impact on the credit rating, as it is noted in the credit bureau.
If you want to make sure that you do not fall into the debt trap unintentionally, but do not want to miss out on the flexibility of a credit card, you will be well served with a prepaid card. Otherwise, the payment by debit card is certainly the better alternative to a credit card.
Those who are already in the debt trap, do well to repay the debt to the credit card issuer by the conclusion of a installment loan, in which the monthly interest is only a fraction of the interest at the card institute.