The most well-known rule in personal finance is to live within your means.
But, with so many South Africans living from paycheque to paycheque, combined with the rising cost of living, many are falling into credit card debt traps to help cover their expenses.
While using debts to cover expenses may seem helpful at the time, it’s vital that you avoid unnecessary debts. Below we have compiled a list of the six common debt traps you need to avoid.
1. Payday loans for emergencies
Try to avoid payday loans at all times. As enticing as they may seem, they’re one of the hardest debt traps to overcome and can get you into a vicious cycle. Payday lenders offer you a loan amount with a very high interest rate. Not only will you pay back more in interest, but it’s a once-off payment, which will force you to pay the full amount with your next paycheque. These loans will never work in your favour; instead, they’ll set you back financially, which will require you to get another loan so that you can cover your monthly expenses, making it hard to come out of the debt trap.
2. Using your credit card to cover your expenses
Credit card companies can make their deals look very appealing. They offer cashback or points every time you use your credit card, which may seem worthwhile. While you can get the most out of your credit card, it’s best to be careful. If you find yourself using your credit card to cover a large number of expenses and you're not able to pay the full balance or minimum payment at the end of the month, then it becomes a slippery slope. This will not only make you dependent on your credit card, but the points you were trying to earn won’t be worth it when you have a hefty balance you’re struggling to pay off. If you have a credit card with cashback or points, use it wisely by setting a spending limit that you can afford to pay off each month. That way, you’re using it responsibly and in a way that won’t cause sleepless nights.
3. Store cards for impulse spending
Many retailers offer store cards, which can contribute to impulsive purchases. This is not to say store cards are the enemy and you should steer clear of them. Like credit cards, store cards are an effective way to build and keep a good credit score, which you can check on DirectAxis Pulse. However, it becomes a problem when you have no control over your credit and recklessly purchase things you can do without. And, when you fail to pay on time or pay over a long time, you’ll easily rack up interest. Which means you’ll have to pay more than you spent in the first place. Paying high interest for consumable items is never the right way to manage your finances.
4. Seeking finance from micro-lenders
Micro-lenders typically lend more than you can afford. They also offer high interest rates, usually at 20-30% per month. This rate is higher than the Usury Act limit, which is set at 27% per annum. Seeking finance from micro-lenders will only set you back financially, and it’s a definite debt trap.
5. Overdraft facility
An overdraft facility can be helpful to pay for something you urgently need when you don’t have enough money in your account. But use it wisely. For instance, pay it off immediately to avoid incurring high fees. Make sure you read the fine print and understand what is required of you.
6. Minimum payments
Avoid paying only the minimum amount due on your credit card or store account. This is a debt trap waiting to happen. Not only will it take you longer to repay, but it’s not a feasible path to a debt-free life. Your interest will increase each month, and you’ll end up paying far more than the agreed amount. If you cannot pay back the full amount due, pay more than the minimum amount to help tackle your debt faster.
We understand how easy it is to find yourself overwhelmed with debt. It’s therefore important that you remain vigilant of your financial situation. We’re always eager to help our customers make the best financial decisions for themselves and their future. Use DirectAxis Pulse to help you keep track of your credit status and manage your finances for your debt-free journey.