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Credit card as a way to debt trap – what are its negatives?

In many cases, you will come across a number of advantages and positives. What are you talking about? It’s a credit card that is attracting more and more banks today. If we start with a brief description, it is necessary to state that it is a credit product – not a classic debit card available to a bank account. And because it is a loan, it can itself be a risk. Often, however, larger than a classic loan. Let’s take a look at the negative aspects of a credit card and why it can be seen as a ticket to travel to a debt trap.

Management fees

Management fees

There are few credit cards that do not pay management fees. However, for most market choices, make sure you pay the fee. The most advantageous cards are tens of crowns per month. For others it can be hundreds of crowns. It should be noted that the fee is not related to whether or not you use the card. Even if you only have it in your drawer at home, you need to pay each month.

Speaking of fees, it is a good idea to be aware of the special offers of some banks. They try to give a good impression by giving their credit card product free of charge. In practice, however, this is nothing but their forgiveness for a few months. Then you will pay them again.

Interest rates are high

Interest rates are high

The credit card works very easily. You have an associated bank account with a real zero. With each use of the card you go to minus and thus use the credit line provided. And it is precisely the money spent that pays interest rates. And it doesn’t matter how you use the card. Standard applications include:

  • ATM withdrawal
  • Payment at the merchant – both classic and contactless
  • Online payment when shopping at eshop

Using the given application means that you are drawing a loan. And it is really big interest. When we mention that they are in tens of percent, we are definitely not talking about the least advantageous credit cards. We are talking about what is now considered an absolute standard. Add to this the fee and it is clear that credit card may not be anything convenient.

Minimum installment amount

Loss of overview of finances

Few know this, but the credit card is also associated with the need to think of a minimum installment. And it can often significantly complicate people’s plans. Among other things, because it can lead to various penalties or even cancellation of the card and the necessity to pay the amount spent at the same time, within a few days.

Minimum repayments are quite common for credit cards. They are either set on a flat-rate basis or based on how much money is spent. In practice, this means that if a certain amount is spent during a certain period, at least a minimum amount of money must be sent to the credit card. This is mostly used to cover interest rates. If the limit is drawn, the minimum repayment term is approaching, and the credit card owner has nothing to take from, it can be a combination of very unpleasant situations.

Loss of overview of finances

A credit card can also be a problem product in the sense that it can cause a significant loss of family or personal finances. When we look at classics, people have money:

  • On the bank account
  • At home in cash

In both cases, when paying they clearly see that money is diminishing, so it is necessary to count to keep the money. If a credit card comes into play, people have the impression that they still have enough money, as there are a few thousand left in their accounts and at home. But the cards are taken down and people usually find out from the statement. And in practice, this may mean that their budget has been quite drastically overstretched.

Significant debt

Significant debt

A credit card is a credit product, of course, to obtain income information. While for loans the conditions are quite demanding, for credit cards everything is more benevolent. Not only with regard to the fact that they may have higher approvability. It should also be borne in mind that they also involve the risk of significant indebtedness. If credit cards offered a limit of a few thousand, coupled with the possibility of solving short-term financial problems, there would be nothing wrong with them. However, it is a credit product where credit limits go up to tens of thousands and hundreds of thousands. Anyone who runs out of this amount will only return it very complicated.

Worse repayment

Worse repayment

For classic loans there is a fixed payment schedule. The repayment amount covers not only the interest itself, but also a part of the principal. Thus, the amount of the loan is reduced every month to zero. At the same time, although people can repay less, few do. Most actually pay only what they have to, and use the remaining money exclusively and only for personal consumption.

With credit cards, there are also repayment regulations, but only the minimum. They usually cover the maximum amount of the fee and interest. And since people are basically not obliged to pay more, they only send as much money as they really have to. They have been repaying regularly for several years, no longer using the credit card due to exhaustion, yet they have not yet managed to reduce the value of the spent amount.

Spending on uselessness

Spending on uselessness

When money is not visible – in your wallet or account, people think less about what the money is actually spent on. And so they spend money on useless money with a credit card. For things they would never have bought otherwise. If they have it, why not. If they do not and do not go down, it is a problem not only current, but also a problem that can be described as future. Mainly with reference to the above and that long-term debt risk.

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Bank gives you money tips and advice

The purpose of this site is to provide clear and objective information on the subject of borrowing. First of all we provide an overview of some basic concepts, such as credit, interest, repayment and duration. Then we look at the most common types of loans: collateralized lending, personal loan, revolving credit, standing in red, installment purchase, hire purchase and lease.

Borrowed money, but I cannot pay back!

Unfortunately, people sometimes get into trouble by taking out (too many) loans. We therefore first look at the stages that are followed when debts arise. Then we describe the options for debt mediation and (if things really went wrong) debt restructuring.

We then pay attention to a few lenders where you can go for loans; the BKR or Bureau for Credit Registration in Tiel; the possibility to borrow without BKR testing; and the tax aspects of borrowing.

NB: as stated, the site contains objective information about borrowing; we do not offer loans ourselves. If you want to take out a loan, you can go to all kinds of financial intermediaries, which we show on this site by means of banners. It can be worthwhile to compare the conditions of different providers well!

Borrowing

Borrowing

Borrowing on the basis of collateral is often cheaper than taking out a revolving credit or a personal loan. That has a simple reason. When there is collateral, lenders have more certainty that they will eventually see their money again, and in the financial world it simply applies that the requested reward (interest) is closely related to the risk to be taken

Forms of collateral

There are different types of collateral borrowing. By far the best known and most common is the mortgage; however, this subject is beyond the scope of this site. Other common forms of collateral are life insurance and securities.

Loan of a policy

It is often possible to use a life insurance policy as collateral for a loan (if there is no annuity clause on the insurance and the insurance is not part of a life mortgage). How much you can borrow in such a case depends on the surrender value of the policy.

Securities lending

Those who own shares or bonds will often be able to use them as collateral when taking out a loan. (A special case of this is the securities credit: the securities already held are used as collateral to finance the purchase of new securities.)

Personal loan

Personal loan

The personal loan (also known as PL) is a form of descending (mostly consumer) credit for private individuals that came up at the beginning of the 1960s. Unlike with a revolving credit, with a personal loan the amounts already repaid cannot be withdrawn.

With a personal loan, the borrower borrows a certain amount, at an agreed interest rate that does not change during the term of the loan. A big advantage for the borrower is that he knows exactly where he stands. The repayment of a personal loan takes place in equal (monthly) installments. These consist partly of repayment and partly of interest. The main lenders offering personal loans are the financing companies, followed by the banks. The provision of personal loans in the Netherlands is currently regulated by the Consumer Credit Act.

Benefits of a personal loan

A personal loan is in many cases a relatively attractive form of financing. Firstly, the interest is often much lower than with other forms of credit. The interest, the duration and the installment amount are also fixed, so that the borrower is not confronted with unpleasant surprises.

Moreover, this fixed term can be adjusted to the economic life of the property to be financed. Personal loans usually contain “built-in” coverage against the death risk: if the borrower dies, then his debt (sometimes: up to a certain maximum amount) is waived. For older people it can be difficult or even impossible to get a revolving credit. Especially if they have no collateral, the personal loan is often the preferred form of financing for them.

Revolving credit

Revolving credit

The revolving credit is a form of financing in which, unlike a personal loan, it is possible to re-take amounts already repaid. The term of a revolving credit is variable in practice, so that the borrower can flexibly withdraw and repay money. A theoretical term is set when the loan is taken out, but it does not have much practical significance because of the assumptions underlying it.

Other features of the revolving credit are:

  • The duration is variable
  • The interest is also variable
  • The installment amount can change
  • Early repayment (without costs) is possible

Credit limit

The lender and the borrower agree on a credit limit or credit limit: the maximum amount that the borrower can borrow at any time. However, it is up to the borrower to determine how much he or she actually wants to borrow, as long as the total amount remains within the agreed credit range. A borrower can withdraw the full amount immediately upon commencement, but it is also possible to do so in a number of steps. In addition (as already indicated above) already repaid amounts can be withdrawn

Duration

The term of a revolving credit is variable in practice, so that the borrower can flexibly withdraw and repay money. A theoretical term is set when the loan is taken out, but it does not have much practical significance because of the assumptions underlying it.

  • The credit space is fully utilized immediately upon commencement
  • The interest rate does not change during the term
  • The borrower does not make additional repayments
  • The borrower does not follow up
  • The installments are paid on time every month

However, it may be clear that these assumptions are usually “in conflict” with the specific (flexible) nature of the revolving credit! If the interest rate changes, with a “variable revolving credit” both the installment amount and the term of the credit change; in the case of a “fixed revolving credit”, only the term changes in such a case.

Term amount

The designation “variable” and “fixed” just mentioned for the two types of revolving credit actually relates to the installment amount to be paid. With a fixed revolving credit this is based on the agreed credit limit. Any follow-up withdrawals, extra repayments and interest rate changes have no consequences for the amount of the installment amount. (They do influence the duration of the loan.)

The installment amount for a variable revolving credit, on the other hand, depends on the credit actually taken out. Extra withdrawals and repayments here do have consequences for the amount of the installment amount, just like interest rate changes. Term amounts consist of an interest part and a repayment part. Because the loan is repaid, the outstanding debt decreases with the passage of time. As a result, the term amount also decreases with a variable revolving credit.

Early repayments

With a revolving credit, the borrower always has the option of paying off (extra) early; there are no costs involved (unlike a personal loan or other forms of expiring credit).