Debt Recycling, no I’m not talking about doing your part for the financial environment. Here we’re talking about a toxic problem that can be extremely hazardous to you if you don’t break the cycle.
So I guess what we’re going to be talking about in this article is, “DONT RECYCLE DEBT!!!”
Overdrafts and credit cards are some of the most delusional banking products that a consumer can utilize, if not understood and used for its intended purpose. If not managed with supreme caution, you can quickly find yourself in a spiralling vortex of debt.
Many South African consumers use more than 70% of their income for debt repayments before they even purchase their monthly groceries…70% that’s a scary percentage people.
Even worse is that in some instances consumers use a credit card facility to pay off another credit card, or pump it into their overdraft.
So after the consumer pays their credit card instalment or gets their salary paid into their overdraft, their back to swiping and utilizing the overdraft facility again…and again, and so on and so forth.
This ladies & gentleman is called “Debt Recycling”. The scary part is how many consumers choose to believe that they don’t have debt problems due to this delusional process they go through, like clockwork, every month which has become second nature to them.
Let me break it down realistically for you: “why would banks provide you with an interest free period on your credit card if they didn’t want you to pay it off as soon as possible?” A credit card is not supposed to be a product of debt, and it’s extremely hazardous if you start treating it as such.
Are you a consumer that pays their installment and straight away starts using the card again? Or every month you’re going into overdraft mode? If your answer is “yes” to even one of those (if both you have a serious problem), you are recycling debt and are deluding yourself if you think all is well with your finances.
Know this; your monthly installment consists of interest and a capital portion of the debt. Every time you pay your installment and use those same funds again, you work yourself out of having less and less money to spend as you go along.
Here’s an example for you to help you understand this concept:
Your credit card installment is R2, 000.00, interest is R600.00 and capital (the money that will actually go towards your outstanding balance) is R1, 400.00, with an available balance of R20, 000.00.
When you use the R2, 000.00 again (pay your instalment, wait for it to clear and then go back to using the card), the interest will be R660.00, capital R1, 340.00 and your available balance will be R19, 400.00.
That’s just in one transaction; see how easy it is for this to get out of hand quickly?
What you need to know to be able to manage your credit card effectively:
- It is always important to determine your monthly budget and what amount you need to direct to your service fee.
- Credit cards are between 50 to 55 days interest free, “IF” you pay it off in full. The interest free period shows you that a credit card is “supposed” to be used as a cash flow management tool. Meaning an emergency happens, like your medical aid has run out and you need to take your child to the doctor. Not a 50% sale at Edgars and you “just has to have that blouse”…a “fashion emergency” is something else entirely and this is not that article, so refer to GQ Magazine if you’re having a fashion crisis because the grownups are talking here.
- The instalment is made up of three things, be clear on this because consumers are always shocked by the realisation their not just paying off a capital balance. So the instalment is made up of interest, capital and monthly service fees. So keep in mind you’re not just paying interest, the monthly fee charges add up as well. Are you scared yet?
- Your credit cards “straight facility” should not be more than a budget calculated for day to day expenses. That way you won’t overspend, you can settle your credit card off in full and you can bypass paying interest to the bank. So again, I sing my same old song here, “A BUDGET IS IMPORTANT!!!”
- When you are paying off one credit card with your other credit card, you are responsible for two monthly instalments. You have less money to spend (or save for that matter) as you’re “recycling” two debt accounts.
So to speak plainly it’s a downward debt spiral, where your debt situation is getting worse fast, but you’re ignorantly thinking your “ok” because your two accounts are getting paid – what you’re not noticing is the noose getting tighter and tighter around your neck as the instalments get bigger, and balances get larger.
Ask yourself an honest question now: “are you recycling your debt?” If so, then it’s time you do something about it.
Oyisa United Debt Specialists is therefore committed to assisting consumers struggling to make their debt repayments and facing financial difficulties, to solve their debt problems and empower them to take back control over their financial situation.