Your first credit card (and how not to wreck yourself)

The deal, in one sentence

A credit card lends you the bank’s money for a few weeks and charges you nothing if you give all of it back on time. If you give back less than all of it, it starts charging interest at rates that make everything else on this site look small. Same piece of plastic, two completely different products — and which one you get is decided by you, every month.

That is what revolving credit means: you use it, pay it, and use it again up to your limit without asking twice. The convenience is real. So is the fact that banks make their money from the people who do not pay in full.

The CAT is the only number worth comparing

Every card advertises an interest rate, and that rate is not what the card costs you. It leaves out the annual fee, the insurance, the charge for a paper statement and the rest. What you want is the CAT, Costo Anual Total, which Banco de México defines as a standardized measure of financing cost, in annual percentage terms, that includes every cost and fee attached to the credit.

Two things follow. First: comparing two cards by their interest rate is comparing the wrong number, and one with a lower rate and heavier fees can easily be the more expensive one. Second: because the CAT is standardized by regulation, 60 % at one bank and 90 % at another mean exactly the same thing. It is the one figure that is genuinely apples to apples, and every issuer is required to show it to you.

One asterisk that rides on every ad and that almost nobody reads: since 17 November 2009 Banxico requires the CAT to be calculated without the IVA on fees and interest, which is why the number always appears as “CAT 60 % sin IVA”. It is still the right figure for putting two cards side by side. It is just not the whole bill.

Banxico publishes a free CAT calculator and, twice a year, a report comparing the real cards on the market by rate and by card type. Both are in the sources below. Ten minutes there before you sign beats any advice anybody can give you, including this lesson.

Why the minimum payment is a trap

The minimum payment is not your bank’s opinion about how much you should pay. In Mexico, Banco de México sets the formula by circular, precisely so that each minimum payment chips at least something off the principal — because left to themselves, the numbers were small enough that the debt never moved. The formula is the greater of two amounts: 1.5 % of what you owe plus the interest for the period with its IVA, or 1.25 % of your credit limit.

Even with the rule, the minimum is built to keep you afloat, not to get you out. Run it: you owe 10,000 pesos on a card at 45 % a year. One month of interest is 375 pesos — and the bank adds 16 % IVA on top, 60 pesos more, because in Mexico the interest on a card is taxed. Your minimum is 150 (the 1.5 %) plus those 435 = 585; the other branch, 1.25 % of a 30,000-peso limit, is 375, so the first one wins. Pay exactly that and 435 went to interest and its tax; 150 went to the debt. You paid 585 pesos and your balance moved 150.

Repeat that and the balance crawls while you feel like you are paying religiously. This is compound interest pointed at you: whatever interest you did not cover gets added to the balance, and next month you pay interest on that too.

Those 150 pesos are the entire point of the circular: they are the only part of the minimum that gets you anywhere, and they are there because a rule put them there. The IVA, for its part, is why a card advertised at 45 % actually costs you 52.2 % (45 × 1.16), and why the CAT you compared above is quoted sin IVA.

One line worth memorizing. The minimum payment is the number that keeps the bank happy. The number that gets you out is the whole balance.

When the interest actually starts

Most cards give you an interest-free window: from the day you buy to the payment due date, usually somewhere between twenty and fifty days depending on where in the billing cycle the purchase landed. Pay the full statement balance by that date and the interest for the period is zero. That is not a promotion, it is how the product is built.

The moment you pay less than the full balance, two things happen and only one of them is obvious. The obvious one: the leftover starts accruing interest. The one that surprises everybody: on many cards you also lose the interest-free window on new purchases, so the coffee you buy tomorrow starts charging interest tomorrow. Check your contract on this exact point. It is the difference between a free tool and an expensive one.

What all of this buys you later

Here is the part that makes a card worth having at eighteen rather than avoiding. Every month you pay on time gets reported and becomes your credit history, which is what a bank reads before lending you money for a car, a flat or a business.

Having no history is not neutral. To a lender, someone with no record is an unknown, and unknowns get worse terms than someone with two boring years of small payments made on time. In Mexico that record lives at Buró de Crédito, and you are entitled to your own report free once every twelve months. Asking for your own report does not damage it. Do it once a year, the way you would read a bank statement.

Three ways people get hurt

1. Reading the limit as income. A 30,000-peso limit means the bank will let you owe 30,000, not that you can afford it. The tools on this site exist so you can watch what a payment actually does over time before you commit to it.
2. Paying one day late. A late fee, plus interest, plus a mark on your history: three punishments for one slip. Set up an automatic payment for the full balance and stop relying on memory.
3. Paying a card with another card. Moving expensive debt from one place to another does not shrink it. Only money shrinks it.

The short version

A credit card is free if you pay it in full and brutal if you do not. Compare cards by CAT, never by the advertised rate. Treat the minimum payment as what it is — the bank’s floor, not your plan. Pay the whole statement before the due date so the interest never starts, and let the months of on-time payments build a credit history that will be worth real money to you at twenty-five.