Life’s little surprises always bank on credit facilities. Raj, a 35 year old executive built his dream house which he financed through credit. To meet his new lifestyle requirements, he went on a spending spree adding more electronics to his foray through his credit card. Little he did realize that his debt slowly was snowballing to a huge sum.
Be it your car’s sudden overhaul, a mobile upgrade or an unexpected medical expense, credit is the immediate answer for many. But beware that these credit opportunities are just sugar coated debt traps.
How do you know you are slowly falling into the debt trap because of these credit facilities?
Well, there is no one answer to this tricky question. There are some signals which we need to lookout for and get back to track before things go awry. Read on to learn some of the signs of the debt trap.
Falling into the debt trap by exhausting the grace period:
What most of us don’t realize that most of the lenders have grace period for making payments? While these additional days do make us feel great initially, the feel good factor doesn’t last long. Taking advantage of the grace period can be dangerous. Use these days only for those little mistakes that happen in life. Routine deviation from the actual payment dates is the first sign of danger towards the debt trap.
Take a minute to check yourself. In the last 3 months how many times, you have used the grace period for paying your credit card bills, utility bills, insurance premiums and the like. In case if you miss the grace period also, then you may need to pay hefty amount as penalty or interest. This is how most of us fall into the debt trap unknowingly.
Falling into the debt trap by exercising the credit limit:
Credit cards allow you to spend money you don’t currently have, and to repay what you’ve spent over time instead of all at once. At the offset, when we make small purchases it seems easy to pay them off. The real trouble of the debt trap begins when we start to pay only the minimum charges which barely cover the finance charges. Every small unpaid amount can accumulate over time and when the outstanding balance begins to march north, the ratio of the ‘credit used’ to the ‘credit available’ goes awry. Refrain from pushing your credit limits too far.
Falling into the debt trap by lagging in payments:
This is the most obvious time for you to ring the alarm and awaken yourself from being caught in the debt trap. What might seem to be acceptable exception for a delayed payment for once slowly turns into a practice, tending towards an insurmountable debt. Adding fuel to the fire is when we are levied late charges and penalties for paying only the minimum amount.
Understand how these signs lead you to the debt trap:
As your debt increases you will soon end up in a debt spiral, which affects your financial position gravely.
Understand the consequences you will face due to this debt trap:
Apart from a bad credit score, the debt trap will impact in the below areas.
Basically, it can lead to financial stress of two kinds – drains the relationship between you and your spouse, and in dollar terms, strains your financial ability. The total quality of your life goes havoc.
How can you overcome this habit and avoid the debt trap?
“If you fail to plan, you are planning to fail.” Benjamin Franklin. The key to any problem lies in planning. To ensure that the much sought after boon of today’s time – credit, does not turn into a bane, you could try:
Credit is a bouncing ball, the harder you throw, the faster it rebounds.
We cannot even imagine a life without a credit card nowadays. But it’s never too late to take steps toward building healthy credit; it clears confusion, adds clarity to your financial planning and results in better financial life for years to come.
Take an effort to get out of the debt trap right now. The longer you put it off, the harder it will be to get out of debt and to pay everything off. The hard work is worth it, and when you are debt free, you will have more money in monthly budget. A debt pay-off plan help a person become debt free. Similarly a complete and comprehensive financial plan will help you achieve financial freedom. If you want to understand our 360 degree financial planning process, we offer