PORTO ALEGRE, Brazil — Ady Chaves opened her bank statement reluctantly.
In the fine print of the lengthy credit card contract was the figure the 26-year-old preschool teacher had dreaded to learn: 455 percent. The annual percentage rate on her card from Nubank, one of many new branchless “digital banks” springing up in Brazil.
That rate is the reason that the debt Chaves took on in summer 2022 to purchase classroom materials has ballooned to an amount she says her salary will never cover. It’s why she resorted to buying beans and rice on an installment plan. Why her credit is bad. Why she lost more than 10 pounds.
Brazil has long suffered exorbitant interest rates. The average APR on a consumer credit card here is 431.6 percent, according to the Central Bank of Brazil — a result of historically high inflation, a lack of regulation and limited competition in the banking sector.
But as more Brazilians sought credit during the pandemic and subsequent recession, a new crop of lenders swooped in. Many are funded by Silicon Valley and other elite American investors; Nubank was backed by Warren Buffett, Josh Kushner (Jared Kushner’s brother), Peter Thiel and Sequoia Capital before it went public in 2021.
The new banks say they’re promoting financial inclusion, giving some of Brazil’s poorest citizens access to credit for the first time — through their smartphones.
In this effort, Nubank spokesman Rafael Corrêa said, the issuer is doing better by borrowers than the rest of the industry.
Seven percent of Nubank debt is assessed at the highest APRs, he said, eight points less than the industry as a whole. The 90-day default rate for the poorest customers is 8.3 percent — about three points less than the industry average.
“Nubank has been revolutionizing Brazil’s extremely concentrated financial system not only by democratizing access to financial services and products, but also by offering lower fees to our over 85 million customers base,” Corrêa said.
Josh Kushner’s Thrive Capital, Thiel’s Founders Fund and Sequoia Capital declined to comment. Buffett’s Berkshire Hathaway did not respond to requests for comment.
Most borrowers here don’t pay such high rates. It’s when they miss a payment that they get charged the astronomical APRs. By law, a lender cannot charge those rates for more than 30 days before offering borrowers the opportunity to parcel out payments. But the average rate in such cases is still more than 190 percent, according to the Central Bank.
These lending practices are exacerbating an existing consumer debt crisis here — with disastrous consequences for borrowers who struggle to understand what they’ve signed up for. Now the government is trying to address the problem.
In the United States, charging an APR of 455 percent on a consumer credit card is virtually unheard of — and in some cases, would be illegal, said David Silberman, a senior fellow at the nonprofit Center for Responsible Lending.
Twenty states plus D.C. set limits on the interest rates that payday lenders may charge; the highest of these is 36 percent, permitted by several states, according to the center. Lenders nationwide are barred from charging more than 36 percent to active-duty military service members and some of their family members. Federally chartered credit unions may not charge more than 28 percent.
This legal patchwork has helped keep credit card rates in the United States under 30 percent. The average APR on new U.S. cards ranges from 20.7 percent to 24.6 percent — a 30-year high, according to WalletHub.
But in Brazil, which lacks comparable regulations, staggeringly high rates are common.
“The entire system has been treating every borrower as if they were the worst possible borrower,” said Claudia Yoshinaga, a finance professor at the Fundação Getulio Vargas, a university in São Paulo. “Not only is this unreasonable, it makes it so that many people become worse borrowers because they simply cannot repay the debt at that interest rate.”
Tens of millions with ‘dirty names’
Government officials and private analysts once touted the expansion of credit here as a success story — a tool that helped lift millions into the middle class. But the level of consumer debt has ballooned into a national crisis. As of July, 72 million people, about a third of Brazil’s population, were saddled with nomes sujos — “dirty names” — meaning they’d defaulted on their debt, according to the credit bureau Serasa. It’s seen as the most challenging obstacle to restoring the economy of Latin America’s largest country and to the economic agenda of President Luiz Inácio Lula da Silva.
More than 55 percent of the credit card debt of people who pay the average APR in Brazil is delinquent by more than 90 days, the Central Bank reports. In the United States, the 90-day delinquency rate for the third quarter or 2023 was roughly 2 percent, according to the credit bureau TransUnion.
Lula, who took office at the beginning of the year, made a campaign promise to use the power of the federal government to renegotiate the debts of tens of millions of defaulters. He rolled out the Desenrola program in July; more than 600,000 people have renegotiated their debts. And in October, lawmakers passed a bill that would cap rates at 100 percent beginning in January if the industry doesn’t come up with an acceptable plan on its own.
But the government here has little authority to address the roots of the crisis.
Annual inflation in Brazil in November was 4.68 percent, a point and a half higher than in the United States. The Central Bank’s benchmark lending rate is 11.75 percent. But credit card rates are set by private banks, each of which prices risk individually.
Analysts say the methods by which lenders calculate rates are out of step with reality — the product of an uncompetitive market with little transparency or regulation. Brazil’s four largest banks control 63 percent of the credit card market, according to the Central Bank. In 2022, they enjoyed their most profitable year yet — giving them little incentive to reduce their rates.
Until last year, lenders were not required to share borrowing records with one another, making it difficult for consumers to develop a credit history that could help them argue for lower rates.
Yoshinaga, the finance professor, asks students from high-inflation countries such as Argentina, Venezuela and Nigeria to guess credit card rates in Brazil. “No one ever imagines it is this high,” she said.
Card issuers in Brazil, as in the United States, make most of their money off customers who can’t pay their full balance each month. Brazil’s high interest rates quickly make the debt insurmountable.
‘The debt is a snowball’
In Morro da Cruz, a hilltop favela in the southern city of Porto Alegre, consumer debt afflicts nearly every home.
Jauna Morais de Aguirre shows a credit card from C6. It’s one of three maxed-out cards that the stay-at-home mom says became her lifeline after she separated from her husband during the pandemic. An initial balance of around $94, spent on diapers, milk and food, quadrupled in less than a year, she says, after her ex-husband stopped paying it down.
Eager to develop a source of income beyond her monthly welfare benefits, she borrowed money from her mother to take a course in nail and eyebrow care. But she can’t buy the equipment to start a beauty business, she says, because her nome sujo prevents her from getting another credit card.
Instead, she makes small cash purchases — nail adhesive, clippers, gel polish — every few months. A bed for her two-bedroom shanty (the family of seven now sleep on the floor) remains a distant dream.
“Everything I want to do in my life, I can’t because of this dirty name,” she said. “The debt is a snowball.”
C6 did not respond to a request for comment.
Fifteen minutes down the hill, Tucha Jamaica, a 37-year-old second grade teacher, is 10 years into a debt she doesn’t expect to ever pay back. A decade ago, she lent her credit card to a colleague who claimed she needed it for an emergency. (Sharing cards among friends and family is a common practice here.)
The friend went on a shopping spree and disappeared, Jamaica says, leaving her with a debt of nearly $500. She canceled the card, but the debt soon quadrupled, she says. At one point, payments on interest alone were so steep that Jamaica and her husband, who also has a nome sujo, resorted to sifting through neighbors’ trash for recyclable cans to sell so their children could have milk.
The call log on her cellphone shows multiple missed calls each day — collection agencies, she says, for the retailers where her former friend used her card. She tries each monthly payday to renegotiate the debt, she says, but even the settlement amounts offered by the bank are unaffordable.
Her phone rings. A debt collector, she says. She doesn’t pick up.
‘Another source of chronic indebtedness’
During Lula’s first stretch as president, from 2003 to 2010, a boom in commodities prices helped lift tens of millions of Brazilians into the middle class.
Even during the Great Recession from 2007 to 2009, the economy here was fueled by demand from China, which was willing to pay soaring prices for Brazil’s agricultural exports. Foreign investment more than doubled, wages and employment grew, inflation fell, and Lula’s signature social welfare program, Bolsa Familia — “family allowance” — gave the poorest Brazilians cash to spend.
The growth enabled a massive expansion of credit, as Brazil transitioned into the global financial system. Tens of millions of Brazilians used their new credit to buy refrigerators, cellphones, televisions and cars.
When the credit reporting agency Experian bought a controlling stake in the Brazilian credit bureau Serasa in 2012, it described Brazil as one of the world’s “most attractive growth markets for credit products.”
But macroeconomic tides turned quickly. The country plunged into a deep recession in 2014. Then came the pandemic, and with it, another cycle of recession and inflation, from which the country has yet to recover. Brazilians took on large amounts of debt to make ends meet.
New credit products were launched ostensibly to help people weather the crisis. The Central Bank loosened restrictions on who could lend, a move meant to spur competition in the financial sector. A wave of financial technology start-ups descended on the market.
These new branchless banks, including Nubank, C6 and Neon, offered accounts and credit cards to millions who had been rejected by traditional banks, because they had bad credit or worked in the informal economy, through smartphone apps. To reach a younger generation, the companies hired spokespeople such as the Brazilian supermodel Gisele Bündchen, and recruited prominent influencers to sell cards on Instagram.
“The positive is that they’ve created a lot more financial inclusion for people who didn’t have access to traditional banks,” said Rosana Pinheiro-Machado, an anthropologist who researches credit and debt in Brazil. “The dark side is that they have become another source of chronic indebtedness.”
Neon did not respond to a request for comment.
Nubank’s blockbuster IPO on the New York Stock Exchange in 2021 made it the most valuable bank in all of Latin America — before it had turned a profit.
In interviews, more than a dozen indebted Brazilians said having a credit card felt like a pathway to broader social acceptance in a highly classist society. But as Chaves discovered, that feeling can carry a high price tag.
The preschool teacher began to use her Nubank credit card more frequently in June 2022, to pay for online courses and materials for early childhood educators. The courses cost about $200 — equivalent to about a month and a half of her salary.
Chaves says her employer at the time, a private preschool in southern Bahia state, wouldn’t pay for them. But she needed them, she says, because her education hadn’t sufficiently prepared her to teach young children and she wanted to have more confidence in the classroom. As the first person in her family to go to college — her parents were farmhands; she grew up in a house without running water — she was driven to become a successful professional.
To pay for the courses, she broke her debt into installments to be paid over 12 months — a common practice, known as parcelado, that analysts here say typically drives up costs for borrowers.
That September, she says, her employer, pleading a lack of cash, stopped paying her. Soon she was unable to cover her utilities or food.
She got a new card from another digital bank to buy groceries. Each week, she would spend about $6 to buy three staples — beans, rice and pasta — which she divided into two payments. She cooked on Sunday nights and tried to make the food last an entire week.
Ashamed because she had no money, she stopped leaving the house. Her hair started to fall out. She lost weight. She was too embarrassed to ask her parents for help.
Now the debt on her Nubank card is about $1,681 — three times as much as last year.
She’s teaching at a different preschool, where she earns $369 per month. She feels “total despair.”
Nathália Rodrigues, a 25-year-old from the working-class city of Nova Iguaçu, has attracted more than 1 million followers on social media with advice for debt-ridden Brazilians.
“Here the culture is, the minute you turn 18, you get a bank loan or a credit card,” said, Rodrigues, who goes by Nath Finanças online. “Because people here earn very little, even for something as a small as a T-shirt, people will choose to parcel it out. … They don’t think about how they will end up paying five times the value of the shirt.”
But naive or ill-informed borrowers are only partially to blame, she said.
“If we had a just system, people would be able to pay back their loans,” she said. “It’s not designed that way.”
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