Let’s talk about debt recycling. And yep this really exists. It’s also incredibly risky…
Debt Recycling is when you pay a balance towards your credit card, overdraft, or revolving loan but then continue to use the amounts you’ve paid towards your debt throughout the month.
A study showed that as many as 70% of South African consumers use their income for debt repayments before they even purchase their monthly groceries.
Most of us dread payday. Because as soon as we get paid, our debit orders start running. But if you’re already struggling financially and payday comes around, with those debits starting to go off, just like that you have almost nothing left, and then you start to worry about basic living expenses for the rest of the month.
Credit cards, revolving loans and overdrafts are some of the most dangerous banking products that you can make use of if you don’t use them correctly.
The most common mistake we all make is to fall back onto our revolving credit such as overdrafts and credit cards.
Consumers who use their debt to pay for living expenses often believe they do not have a problem when their credit record is still in good standing and they are still able to make all their repayments on time. However, if you fall back into your overdraft or credit card every month to pay for living expenses (and even luxuries) you are just recycling the debt. And the interest does not go down on these accounts, along with the balance
To avoid recycling your debt you need to learn how to manage your credit.
Here are 5 ways to avoid recycling your debt:
1. Never take cash out of your credit card
Taking out cash is an expensive way of using your card as credit providers add fees and interest on withdrawals and even when you swipe.
You can also read this article to better understand how to manage your credit card.
2. Pay more towards the account:
It is always to your benefit to pay more than the minimum required payments as this could help save you on interest. The more you pay now, the lower your repayment will become which means you can start paying back the outstanding balance and not interest on interest.
3. Make multiple payments:
Making more than one payment during the month can improve your balance and increase your credit score.
4. Understand the fees that you are charged:
Understanding your fees that are charged on both a credit card and overdraft is important. Look at your statement each month and ask your bank if you are not sure of what they are charging you for. There are different charges, for example, VAT on fees, Maintenance fees, finance charges and more, that you need to be aware of
5. Finally – Do not live off your credit accounts:
When we fall into the habit of living off our credit every month, but we are paying our accounts on time and falsely believe we seem to be managing, it may be time to relook at your actual financial situation.
The only way to get out of recycling debt is to stop using our available credit every month.
Of course, for many South Africans today and even before the pandemic, credit has become a crucial way of getting by every month.
If this is you, it’s worth looking into a more sustainable solution. Debt Review is a legal process where your debt counsellor will negotiate lower repayments for you on your behalf. This will essentially leave money available for living expenses and will stop you from continually going back into debt.
If you’re struggling to pay off your credit cards because the minimum repayment is too high, you may be in trouble. Luckily there is hope. We deal with clients every day who have decided that they no longer want to suffer from debt.
If you would like to know more about how Debt Rescue could help you get in touch today!