The aim of this research is to improve the impact strength of thermoplastic composites manufactured from recycled carbon fiber (rCF). For this purpose, the development of a novel multi-material, micro-scale hybridized and low-cost hybrid yarn by blending aramid fibers with rCF and polyamide 6 (PA 6) fibers through the processing route of carding, drawing and flyer spinning is reported in this paper. In addition, two other hybrid yarns were produced from rCF/PA 6 and aramid/PA 6 for comparison with the multi-material rCF/aramid/PA 6 hybrid yarn. Finally, the tensile, flexural and impact properties of composites based on the developed rCF/aramid/PA 6 multi-material hybrid yarn were compared with those of composites reinforced only with rCF and aramid fiber. The results of the Charpy impact test showed that the inclusion of 24 volume percentage aramid fiber increased the impact strength by 70% compared to the composite reinforced with rCF alone. The multi-material hybrid yarn consisting of rCF/aramid/PA 6 fibers shows good potential for designing a hybrid composite with tailored tensile, flexural and impact resistant properties.