Debt Trap : How to manage credit/debt and 5 ways to pull yourself out of the Debt Trap

Debt Trap : How to manage credit/debt and 5 ways to pull yourself out of the Debt Trap

In order to understand what is Debt and Debt trap ,lets understand credit.

WHAT IS CREDIT

Credit is a fantastic tool for acquiring assets, overcoming short-term financial difficulties, and even starting a business or improving your professional chances. It can give you the security and assurance you need when funding a new venture. However, there are still very few people who really understand how credit works. Let’s make sense of it.

What is credit? Credit is essentially the process of granting someone access to money on the promise they will pay back the amount, or some of it, when they can. The process normally involves the owner of the money, which is usually a bank, lending money to a person who is deemed worthy and who will pay the loan back. The money is then lent to the person who will use it to buy something or pay a bill. The owner of the money gets the goods or money back once the loan has been paid in full.

 Types of credit  can be categorized into two main groups :

Business credit is the name given to the practice of using credit to fund your business.

Personal credit is the process of using credit to support yourself, usually by borrowing money for a personal purpose.

 Both categories of credit require you to be in a good financial state. While credit can be used to benefit your financial future, it can also be used as a vicious cycle if you do not repay the loan in full. You will then be hit with fees and interest payments every month. If you cannot pay the loan, or do not pay the loan on time, the amount of the loan will be increased, usually by a large proportion. The cycle can repeat time and time again until you have reached a point where you are struggling to cover all the bills and other costs.

 The most important factor is to manage credit wisely. Improper and irresponsible credit use can put you in serious financial difficulty and have a negative impact on your ability to obtain future credit.

CREDIT AND DEBT THE TWO DIFFERENT PERSPECTIVES, THE TWO SIDES OF THE SAME COIN

Some individuals do not have the discipline to avoid getting into debt sometimes they get into debt, and sometimes they don’t. But either way, a credit card or other form of borrowing is involved. What is truly worrisome is that there is a financial downside to credit: Some debtors find themselves in a cycle where they are unable to sustain the interest they pay on their debt, and their financial problems grow worse. Other debtors will avoid this cycle by living within their means, but the truth is that living beyond your means is not healthy for anyone’s financial health.

DEBT MANAGEMENT

Debt management is a method of reducing debt by using financial planning and budgeting. A debt management plan’s purpose is to use these tactics to assist you reduce your existing debt and eventually eliminate it.

Debt management plans vary from using a budget to creating a payment plan, and they can be used by anyone who has debt. A budget will show you where your spending money is going and if you spend more money than you earn, you are spending money that is going to be hard to earn.

Whereas a debt management plan is a method of organizing how you can pay off a loan so that you can pay it off over time. With a debt management plan you will get a payment plan that will tell you how much you will have to pay each month to pay off your loan. Some debt management plans are set up to be paid in one payment, while others are set up so that you pay off the loan over a longer period of time.

A debt management plan may also offer you options such as a cash payback plan, allowing you to pay for the loan in a shorter period of time, and no interest, which means that you pay no interest for a certain amount of time. As the name suggests, a debt management plan is the opposite of a credit management plan. While a debt management plan helps you pay off your debts, a credit management plan helps you get a new loan to pay off your old debt. In order to qualify for a loan to pay off your debts, you may need a credit management plan and it can cost you more.

WHAT IS DEBT TRAP

You are probably familiar with the concept of a debt trap. Well, if you haven’t signed any paper before you entered a relationship, you probably don’t have to worry about that! However, if you have a credit card and you don’t pay the bills regularly, you are probably falling in the debt trap!

What do you mean by debt trap?

 Let’s think about a person who is earning money and who is putting his monthly salary into his regular expenses like paying off a loan, buying a car, or buying clothes and shoes. He has no idea that his savings account is also getting empty. He will be continuously buying stuff because the credit card or any other loan he has will keep him up to date and his money will keep on rolling in. After a while, he will find it hard to pay the bills.

If you owe someone money and you have made a promise to pay the debt but don’t pay the debt, you are under the Debt Trap and are liable to pay the debt.

WHY ARE YOU UNKNOWINGLY FALLING IN THE DEBT TRAP

Debt is necessary for a huge portion of the population, particularly the salaried class. Borrowing recklessly, on the other hand, can get you into problems.

Hence, people try and borrow responsibly – in terms of amount and timing of repayment. If you are in the salaried class, having such a financial facility of debt-free repayment is a very necessary element of your financial situation. If the salary you earn is high enough, it becomes a necessity for you to repay it in full every month. But what if your income is low? If you are a part of this category, it will be really hard for you to pay your salary every month, it will be hard to maintain all the household expenses.

 Hence, you need a financial solution which will help you get out of the crisis and it should be very simple as well. Hence, you must consider borrowing from a bank.

In the last year, one out of every five respondents took out a loan to pay off current debts, according to the study. Taking out a loan to pay off another is a classic sign that you’re in debt. If you’re not making enough to pay the minimum payments on your debts, you’re in a serious problem. In the last year, more than 20 percent of people that borrowed used a credit card to pay off debt, the study said.

Debt can also impact your health. If you’re spending more than you’re making, you’re putting your financial and physical health at risk. In the last year, more than half of people in debt spent money to cover up or hide their finances from their partners. These are just some of the problems that can be caused by debt. There are ways to get out of debt, of course. You can look for a loan consolidation, but that usually only makes sense if you’re already making payments and have a fixed monthly amount you can pay.

SIGNS YOU ARE IN THE DEBT TRAP

If you are routinely utilizing more than 60-70 percent of your credit limit, this is a red flag for you. Credit card limits are determined by your income and ability to repay.

This can also be seen as a red flag if you’re spending significantly more than your stated income. Do you have a clear income history to show a direct correlation with your spending? Or do you have an irregular income, but are still spending way more than your regular income?

You should ask yourself why you’re paying more than you need to on credit. Why are you using credit? The only reason for credit should be if it’s absolutely essential to you to buy something immediately. If you can manage without, then there’s absolutely no need to use credit.

• You borrow money to cover your normal expenses: If you are compelled to borrow money on a regular basis to meet your regular monthly bills, such as your children’s school fees, rent, and so on, you may find yourself in a debt trap.
• You borrow to save money: If you borrow to buy a house, for example, and use the money to pay your mortgage, you may have a home at the end of the term of your loan. This saves you money because you have less interest to pay. The loan will only make a profit for the loan holder if you have to sell the house within the term of your loan. If you rent a house, you can keep your house for the term of the loan. This is called a buy-to-rent option.
• You’ve taken a credit card cash advance: If you’re forced to take a cash advance on your credit card, it’ll come with a heavy price. The price is usually set, with an annual interest rate of roughly 50%. As a result, obtaining cash advances is one of the worst ways to get money. If you have to seek a cash advance on your credit card to meet your financial needs, it indicates that you are about to fall into a debt trap.
• Your total EMIs in a month exceed 50% of your monthly income: Compulsive shopping spurred by discounts, easy EMIs, and special deals can put a burden on your budget and lead to debt. Even if these stand-alone EMIs aren’t large, they leave you with little money left over after you’ve paid off your EMI commitments. If you’re paying off EMIs with more than half of your salary, you’re in a debt trap.

In such a situation, you’re better off cutting down your spend on non essentials and putting your money towards your loan. You’re in a bad situation, Your loan provider is imposing new EMIs on you at a higher interest rate. Your loan is not getting paid off as it should, and you feel stuck. Do you think that only by paying off your EMIs can you move on? It is possible to get out of the debt trap. Your first step should be to consult an expert OR CONTINUE READING THE ARTICLE.

• More than half of your monthly income is spent on fixed obligations: Apart from the EMIs, you must also meet a number of set, monthly expenses such as housing rent, children’s school tuition, society maintenance fees, utility bills, and so on. Now, if the sum of all of these expenses exceeds 50% of your income, you are in serious financial trouble.
• You’re taking out a loan based on your future earnings: It’s normal for people to wish for the best. People, on the other hand, frequently fail to account for potential faults when doing so with their cash. So, borrowing money based on your present wage is fine, but you should never borrow money based on planned raises or bonuses, as this could put you in difficulty. So, if you need to borrow money based on your future earnings, something is wrong with your financial situation. But, if you need to borrow money based on your present salary, you’ve probably saved yourself from financial disaster.

Borrowing money to repay your current loan, taking a personal loan for debt consolidation, taking a gold loan to pay off your credit card bills, or doing a balance transfer from one credit card to another, unless these activities are aimed at reducing your interest outgo, are all signs that you are falling into a debt trap.

If you find yourself in this predicament, it is high time you got out of it. However, to save yourself from the unnecessary trouble, it is best that you seek professional help from a debt consultant before taking any steps to solve your debt problem. As a first step, you can seek free advice from a professional debt consultant.

A professional debt consultant will help you determine your debt situation, what is needed to deal with your debt, and what strategies you can put in place to deal with your debt. If you know what is required to reduce your debts, it is time you took the first step to reduce your debt, and seek professional help to assist you.

HOW CAN I MANAGE DEBTS AND GET OUT OF THE DEBT TRAP

What if there was a way to reduce your fixed expenses and still increase your discretionary spending? That is exactly what the financial planning service can help you do.

It might be a tremendous task to get out of debt. Despite how difficult it may be, there are some steps you can do to get out of debt. Ways to free yourself from debt- 

1. Financial planning can show you how to reduce the EMIs you pay on your fixed monthly expenses and use the money you earn for discretionary spending. In this case, you reduce your fixed expenses by:

a) Reducing the monthly housing rent and utility bills you pay by half.

b) If you pay any fees or fees, reducing them by 50%.

c) Reducing the monthly education fees you pay for your children by half.

d) If you have to pay any interest on debts or any other kind of EMIs, reducing them by 50%.

2. After all this, you should have the remaining income to spend on what you need the most. So, your expenses won’t be fixed after all! The other benefit is that you get to spend more on those things that you really want.

3. Your next aim should be to pay off high-cost debts, such as credit card debt and personal loans. Because it’s doubtful that an investment can match the cost of a credit card balance—roughly 40%—it makes sense to pay off the debt by cashing out investments in mutual funds, gold, and other assets.

4. Another alternative is to enlist the help of one’s family. Make contact with family or close friends to see if they can help you find something that interests you.

5. The next step should be to consolidate old loans and leverage your assets to obtain new loans at reasonable interest rates to pay off existing high-interest loans.

The credit slowly transforms itself into debt. Debt trap frequently manifests itself in the form of warning indicators before escalating into more serious issues. If you stay awake and look for clues when one of these warning signals appears, you may be able to avoid a financial tragedy.

Edited and published by Ashlyn Joy