Usury in most countries: Annual credit card interest rates in Brazil reach up to 875%

RIO DE JANEIRO, BRAZIL – Consumers in Brazil who can’t afford to pay the bill in full will incur annual interest rates of over 300% – as high as 875%, according to the Brazilian Consumer Defense Association (Proteste).

In other countries, the rate of the revolving credit card (when consumers pay less than the full amount) is only 3%. “This is the difference between interest rates in Brazil and rates charged for the same service in European countries and in the United States,” argues Miguel José Ribeiro de Oliveira, director of studies and economic research of the National Association of Finance, Administration and Accounting Executives (ANEFAC).

Most debts in Brazil have the same origin, which is precisely the means of payment with the highest interest rates in the whole market: credit cards.

“The card is the means of payment that charges the highest interest rate and is the number one cause of Brazilian indebtedness,” says Proteste researcher and credit specialist Rodrigo Alexandre.

The villain: compound interest

Much of what leads card debt to snowball is the so-called compound interest – a calculation formula that adds “interest over interest.” The amount charged increases because interest is continually applied on top of an amount that was updated and corrected.

“It happens when we stop paying a debt contracted through a credit card,” summarizes Miguel José Ribeiro de Oliveira, director of ANEFAC.

Compound interest is used all over the world, says Oliveira. “The problem is that, as interest rates in Brazil are very high, this compounding results in a huge difference when compared to countries where the interest rate is around 3% a year,” he adds.

“When charged from lower ranges, compound interest has little effect. The problem is that in Brazil, where the ranges are much higher, the end result is annual rates that can exceed 300%, and the difference ends up being effectively very large at the end,” adds the director.

According to Oliveira, the average revolving interest in Brazil is currently around 12.5% per month, which represents a total of 329.3% per year. In practical terms, this means that in 30 days, a R$1,000 debt becomes R$1,125.20.

In a year, this amount would increase 329.3%, reaching almost R$4,300. A survey by Proteste shows that the interest charged by cards can be as high as 875.25% per year – which would turn a R$1,000 debt into almost R$10,000 over 12 months.

“The same debt [R$1 thousand], if paid in installments over 12 months with an average interest rate of 8.34% per month [the average interest rate for installments, according to the Central Bank], corresponds to 161.5% per year. In this case, consumers would pay 12 monthly fixed installments of R$235.04, which totals a final value of R$1,620.48,” adds the director of ANEFAC.

The ranking of interest rates charged by financial institutions can be found on the Central Bank’s website.

Personal or paycheck-backed loans

“If you can change the debt on your credit card for any financing at lower costs, do it. Personal loans have lower rates, but the best would be to take out a paycheck-backed loan, if you can afford it. They are the most cost-effective, with the lowest rates on the market. Take out a paycheck-backed loan as soon as possible to pay off your credit card or overdraft card debt,” suggests the Proteste researcher.

Initially, paycheck-backed loans were offered exclusively to government employees and retirees. However, it has been common for private companies to make agreements with banks to offer them also to employees in the private sector. “It’s also something interesting to discuss at the negotiation table between companies and employees because it allows employees to take out loans at lower interest rates,” notes Rodrigo Alexandre.

“But, to this end, it’s essential to compare it with what the market has to offer,” he says. The first step to switch to a debt with lower rates is to study how much is owed and the debt’s TEC [Total Effective Cost], and then compare it with what other financial institutions are offering in order to find the one with the lowest percentage,” explains Rodrigo Alexandre, from Proteste.

Total Effective Cost

The TEC is not just an interest rate, but the total percentage applied to update a debt, including all financing costs. This includes items such as fees, taxes, and service charges, in addition to the interest rate. It is the main reference for individuals to determine how much more they will have to pay as a result of their debt.

The Central Bank establishes that this information must be clearly available and accessible in simulations and contracts. “This is the percentage that points out who is charging cheaper rates, but unfortunately it is an obligation that not all institutions comply with, for lack of a more effective supervision by the Central Bank,” alerts Proteste’s attorney and researcher.

The most expensive TEC, as already reported, is charged by credit card companies. According to Proteste, next in place is the TEC charged by traditional banks. “And in third place are the Fintechs, startups that handle the financial part, such as digital banks,” adds Rodrigo Alexandre.

Annual fee

Another point that Proteste draws attention to are the offers of free annual fees for credit cards, which is not always true because often it is an advantage offered only for a limited period.

It is common, in these cases, to be charged very high fees once the promotion period is over. Proteste’s survey identified fees ranging from R$190 to R$624 for basic cards, and of over R$1,000 in the case of differentiated cards, with rewards programs and benefits such as travel insurance, discounts, and tickets.

However, some banks do not charge this fee, but condition it to a minimum monthly turnover, which enables the card operator to offset the gains through fees that are paid by stores. “In any case, as today there is more competition, there are several banks – mainly digital ones – offering credit cards with no annual fee. But it is important that consumers be aware of what they are actually paying for,” says Miguel Oliveira, from ANEFAC.

“We always consider the annuity-free product as the best option,” adds Rodrigo Alexandre.

Who to turn to?

Complaints regarding unduly charged fees or rates by financial institutions, or even related to the lack of clarity of information that must be clearly presented and accessible, may be filed first with the Customer Service Department (SAC) of the institution itself, which is in charge of providing a first answer.

“If the answer is unsatisfactory, customers can either turn to PROCON (the Consumer Protection Agency) or to the Central Bank. I believe that the PROCON is a much faster process, but complaints can also be filed with the Central Bank, which has the appropriate procedures for this purpose,” says the director of ANEFAC.