Revolving ceiling reduces debt, but interest rates remain high

In effect since this Wednesday (3), the new interest limit on revolving credit cards is an important step towards reducing debt in the country, experts say. They warn, however, that the measure only applies to new financing and, even with the reduction, interest rates remain high, and consumers should be careful not to get into even more debt.

When the consumer does not pay the full amount of the credit card bill by the due date, they automatically enter into revolving credit. In other words, you take out a loan and start paying interest on the amount you were unable to repay. The problem is that the rotary rate is among the highest on the market.

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According to the most recent data from the Central Bank (BC), in October interest rates on revolving credit cards were, on average, 431.6% per year. This means that a person who enters the rotary in R$100 and does not pay off the debt, owes the equivalent of R$531.60 after 12 months.

After 30 days on revolving credit, consumers must pay off the debt or enter into installment credit and negotiate it with financial institutions.

Now, this revolving interest rate will have a ceiling of 100%. Anyone who fails to pay a bill of R$100, for example, may have to pay, at most, the equivalent of R$200 after 12 months.

According to the Executive Director of Procon-SP, Luiz Orsatti Filho, the measure is an important step. However, he believes that the rate should ideally be even lower. “[A medida] it will benefit the general public and not just the over-indebted, who have this credit card debt, but the general public who, sometimes, need to take out some type of financing”, he says. “For a country like Brazil, this rate is unfortunately still very high. It’s an important step, but we still have a long way to go, but it’s still an important step,” he adds.

Statistics

In Brazil, three out of every four families are in debt. According to the National Confederation of Commerce in Goods, Services and Tourism (CNC), 76.6% of Brazilian families have debt due on credit cards, special checks, store vouchers, payroll loans, personal loans, post-dated checks and car and house payments. The highest percentage of outstanding debts (36.6%) belongs to low-income consumers, up to three minimum wages.

The research also shows that credit cards are still the most used by those in debt, reaching 87.7% of total debtors. “Any credit should be the last option in any situation. It could be an emergency, it could be chance, but it should be the last option, and of course, look for financial institutions authorized by the Central Bank, not any type of unofficial agent. And, of course, look for the cheapest credit, be it payroll, personal and, finally, revolving credit”, says Orsatti Filho.

Economic growth

According to the president of Instituto Locomotiva and founder of Data Favela, Renato Meirelles, the measure is correct, since revolving debt is one of the biggest causes of debt. “The revolving interest rates were higher than what any low-income consumer would pay to a loan shark in the neighborhood where they live, for example. I know the phrase is strong, but it is an absolute truth. There was no loan model that charged consumers more interest and I believe that revolving credit is truly responsible for defaults”, he highlights.

As default rates fall, says Meirelles, new consumer needs will emerge. Furthermore, new economic conditions caused by the reduction in interest rates should influence the decision of authorities and banks. “Whether this will lead to an even greater drop in interest rates, time will tell. But what we see is an incentive, a path for the national economy to reduce interest rates, which has a major impact on reducing defaults, on the one hand, and increasing credit to the lower-income population, on the other, which encourages the growth of the entire economy”, he says.

Research carried out by Instituto Locomotiva in September 2023 shows the importance of credit for Brazilians, who end up using the modality to buy necessities and also to make dreams come true. Meirelles also highlights the importance of interest-free installments, whose change or extinction was even considered in 2023.

According to the Locomotiva Institute, default rates reach 50% among those who paid in installments with interest, falling to 33% among those who paid in installments without interest. Therefore, for Meirelles, the reduction in revolving interest was agreed and will have positive impacts.

Adequacy of limits

For finance professor at Fundação Getulio Vargas (FGV) Myrian Lund, the reduction in interest rates should cause banks and financial institutions to also reduce the limits on credit cards “Each bank gives you an astronomical limit and that ends leading people to consume more than they can pay,” he says.

With the drop in interest rates, institutions will no longer earn from debt fees and this may lead them to review limits, adapting them to each consumer's payment capacity. “The card limit ends up becoming a supplement to your income. In fact, what you need is a process of financial education, where you have to adapt to what you earn”.

The 100% total debt ratio, Lund says, remains high. Therefore, the FGV professor gives some tips to consumers to avoid debt. First, only have one active credit card. “Our mind doesn’t add up the different cards we have, it always thinks we spent too little”, she explains.

The second tip is to reduce the card limit, to avoid spending more than you can afford. And, finally, avoid paying in interest-free installments, except for higher-value goods such as a notebook or a refrigerator, avoiding using this method for daily purchases, such as clothes, the pharmacy or the market. “You would have to save money to pay the following month and very few people do that”, says the teacher.