Credit cards can be one of the most divisive products if not used for its intended purpose. And, if not managed with caution, you can quickly find yourself in a bottomless pit of debt.
Matthys Potgieter, spokesperson and debt expert at DebtSafe, says many consumers use more than 70% of their income for debt payments before they buy their monthly necessities.
What’s worse, in some cases consumers use a credit card (one debt) to pay off another credit card (other debt). Potgieter furthermore explains that after individuals start paying their instalment, they seem to use their credit card again (and again). “This mainly refers to debt recycling,” highlights Potgieter.
Consider this: why would banks reward you with an interest-free period if they didn’t want you to pay off your credit card as soon as possible? A credit card is not a ‘debt product’ and is therefore dangerous when you start using it as debt. Are you one of those consumers: just when you think you have paid the instalment, you seem to use your card again? If so, you are recycling debt.
Potgieter says you have to remember: your monthly instalment consists of both an interest and a capital portion. Every time you pay your monthly instalment and use that same money again, you will have less and less money to spend. To assist you in understanding the concept, *say for example your credit card instalment is R1 000.00, interest is R300.00 and capital is R700.00, with an available balance of R10 000.00. When you use the R1 000 again, the interest will be R330, capital R670 and your available balance will be R9 700.00.
Here are six things you should 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 50 to 55 days interest-free. Do note: if you pay it off in full. The free interest period indicates that a credit card is meant to be used as a cash flow management tool.
- The instalment is for interest, capital and monthly service fees.
- A credit card’s straight facility shouldn’t be more than the calculated budget for day to day expenses. In this way you won’t overspend, you can pay your credit card off in full and you can avoid paying interest to the bank.
- When you are paying off one credit card with the other, you are responsible for two instalments. You have less money to spend (or save) as you are recycling two debts. “It is basically a downward debt spiral, making your debt situation worse – where you rob Peter to pay Paul,” says Potgieter.
Are you recycling your debt? Well then, it is time you do something about it. By gaining insight and with a bit of discipline you are capable of managing and using your credit card for its original purpose.