Juggling’s for clowns, and debt isn’t funny
In today’s world, financial freedom seems impossible but it isn't so. Each and every one of us has the potential to attain the financial freedom we deserve but, it takes a lot of commitment and hard work.
The vast majority of us all have some form of credit and often our wallets are so full of plastic streams of debt, that closing it provides more of a workout than a Monday gym session. It’s important that we understand that credit cards are financial tools and not toys that we can juggle.
A credit card is not an ATM
A credit card should not be seen as some sort of ATM that you can just continue to draw from to offset other debts until payday arrives, then recycle it again, only to draw from it once more.
So many people, and don’t beat yourself up if you’re one of them, have fallen into a serious debt trap as a result of using credit cards to settle or pay off other debt. Paying for debt with debt? Can’t you see the flaw in that equation?
Are the banks to blame?
We also tend to blame the banks and believe for some reason that they’re against us. But why then would they offer an interest-free period?
Banks are trying to assist in offering a time frame where they will not incur any further debts for you. They are simply offering you the cash you don’t have to resolve that emergency, which you can hopefully settle before any interest amounts kick in.
It’s important to understand that our monthly instalments include the minimum amount you are required to pay back as well as the interest that comes attached to the capital loan amount.
Repay and let it stay that way
As soon as we start using our repayment at the next opportunity to spend that very same amount, we will reach your credit card’s limit quicker.
This is due to simple math because you end up paying back more interest to the total spent amount. For example, if you have R10000 available to spend in your credit account, and spent R1000 of it, you owe R700 capital and R300 interest.
If you spend a further R1000, you now owe an additional R330 in interest and R670 in the capital. What are you left with now? It’s R9700, which is less than before, which creates an ongoing cycle of less and less credit until you reach your limit.
That’s the problem, what is the solution?
Well, there’s no hard and fast solution, but we do have a few tips for using your credit wisely. It’s always a good idea to thrash out a budget every month and work out how much you need to pay back to your credit card as well as other expenses.
Credit cards come with a 50 to a 55-day interest-free period which is bestowed upon all consumers, however, it does depend on you paying the money back in full.
This grace period or period where no interest is charged simply affords you the opportunity to properly manage your cash flow. It’s not for any other juggling tactics, no matter how simple it might seem. The instalment covers the interest, capital and any monthly service fees.
If used smartly, you can use it to ensure that you are covering your day-to-day expenses and nothing else! Essentially what this does is deter you from overspending and keep your credit account looking healthy, while avoiding all the nasty interest that no one can afford to have to pay.
Getting more debt to pay off debt
The trap that most people have found themselves in at one point in their lives, if not more, is using a credit card to pay off another credit card. Eventually, you have three credit cards, you can’t remember which one has money on or not, none of which is yours, you’re just juggling multiple lines of debt and before you know it, you’re in serious trouble.
By recycling debt, you’re sprinting to the end of your credit availability, where others are merely sauntering. That monthly repayment could drown you if you can’t afford it. You could end up spiralling into a situation that you’re unable to climb your way out of.
The best advice if you’re headed in this direction or already find yourself there, is to consult your banker and ask for help. They will advise you on how to manage your credit card going forward.
It will most likely start with the process of cutting it up and no longer using it at all, along with creating a budget to bring it down each month. In the worst cases, debt consolidation loans and solutions could be a solution.
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