You fall into debt when having the combination of credit card dues, along with personal loans, vehicle loans or just borrowed funds from friends and family and you keep defaulting on payments.
Whether you like it or hate it, debt is sometimes unavoidable. However, what is worse is when you are unable to control the quantum of debt and eventually fall into a debt trap. For instance, in a bid to repay your existing credit card dues, you would like to avail a personal loan, but it is just a temporary fix. For, in the long run, you will have to take care of the loan repayments.
According to experts, people treat managing debt lightly when it comes to financial debt. Most get stuck in the never-ending cycle of repaying loans, without achieving any financial goals. To stay away from debt, monitor your income sources and your monthly expenditure. You fall into a debt trap when you have the combination of credit card dues, along with personal loans, vehicle loans or have just borrowed funds from friends and family, and you keep defaulting on payments.
Here are a few warning signals to know if you are also heading towards a debt trap:
EMI limit: The rise in your income does not mean that the level of your debt should also increase. Experts suggest the total EMIs should not exceed 40 to 45 per cent of your income. Generally, from your total income, you should try to keep your total loan repayments and EMI payments below 30 per cent, which may exceed by up to 5 per cent but not beyond. If you are heading beyond the 40-45 per cent, know that you are heading into trouble.
Total due: Calculate overall how much you owe to other people. Mostly it is seen that nowadays salaried individuals simultaneously have multiple loans to be repaid, which generally include education loan, personal loan, credit card bill, online credit, car loan, and home loan. Note down the principal amount that has to be repaid, along with the current EMI, the interest rate, and the number of months left to pay off the loan.
The Good and the Bad loan: A good debt is when you have taken a loan from any bank or financial institution for buying either a house or an educational degree. These types of loans help in building assets and also offer a tax deduction. However, when you borrow money to buy a depreciating object, it is termed as bad debt. By segregating debt you will be able to prioritize which of them to get rid of first. Choose on clearing high interest-bearing debts first.
Credit card limit: Stop from further using your credit card, when deep down in debt, until your debts are paid off in full. Try using cash or your debit card while making a purchase if you think you can’t make a cash payment, avoid making that purchase. Note that the interest levied on the credit cards is very high. Hence, limit your credit card usage and keep it only for emergencies.
Avoid New Assets: Also, avoid buying new assets or making new investments until you are out of your debts. Buying a new asset, for instance, a car or real estate, you will have to take on further loans, which is not a good idea when you are already deep in debt. Your credit rating will also take a hit, with loan repayment defaults, which might make it harder to take credit in the future.
Financial Advisor Help: Get the help of a financial planner or advisor if needed to get rid of your debt. For instance, if you have been rolling your credit for some time, or have multiple debts simultaneously, it is better to opt for a financial planner. Debt counseling agencies can also provide the needed professional guidance, as they minutely analyze a debt situation and provide options to tackle it.