5 Signs You Are Falling in a Debt Trap

05 Nov 2018 // 20 min read // Credit Cards
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In the present day scenario, it has become exceedingly convenient for one and all to gain easy access to flexible loan alternatives, and Apply for Credit Cards. While this largely helps in enhancing the financial freedom one enjoys, such convenience can also prove to be overwhelming, and lead one into a vicious circle of overspending and underpaying.

When it comes to managing your finances well, it is extremely imperative to keep your expenses low. However, the easy availability of credit may sometimes spiral you in the wrong direction.

If you feel your current state of finances is having an overpowering effect on you, then it may be time for you to check for any of the below-mentioned signs. If one or more of them seem to be propping up, you may be falling into what is known as ‘debt trap’, which essentially means that you may be carrying a debt of more than 40-50% of your monthly salary, and that you may not be able to keep up with the payments in the long run.

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1 You Are Using a New Loan to Pay for an Existing One

There may be times when you find it difficult to fund an upcoming equated monthly instalment (EMI). In such a situation, it is fairly easy to be tempted to take another loan, and use the disbursed amount to meet your current expenses.

However, this will only lead you to have more than the conventionally recommended 1 or 2 loans, which are both unnecessary and expensive. Considering that you will be required to service all of these loans simultaneously in the coming months, it shouldn’t be difficult to understand that a debt trap is right around the corner.

2. You End Up Reaching Your Credit Limit Every Month

If you are aware of healthy practices regarding the use of Credit Cards, you ought to know that you must ideally use only up to 30% of your Credit Card limit every month. This assures the card issuer as well as the credit bureau of your financial discipline.

However, if you are spending all the available credit on your card, you should know that it is a cause to worry. Not only will it lead you to be constantly worried about the mounting bills, but will most likely leave you broke before the end of each month, thus leaving no room, whatsoever, to meet any contingent expenses.

3. You Have a Habit of Overspending

Every once in a while, we all like to go on a spending spree, but overspending on a regular basis is a strict no-no. If you are someone, who finds it necessary to spend on daily need as well as luxuriant products and services equally and don’t mind borrowing from your friends, relatives, employer and even bank for the same, you might be in trouble. While you may be able to manage the expenses and also return the borrowed sum of money in the short term, this habit will likely take you down the debt-road in the longer run.

4. You Have No Savings

In order to enjoy strong financial health, it is as important to plan for the future, as it is to live a comfortable life in the present. If, however, you live on a salary-to-salary basis with no room for savings, you might be in trouble. Not only will this habit keep you from building wealth, which can later help in you in meeting life goals such as buying a house, kick-starting your business, or planning your wedding comfortably, but will also leave you dry in your old age. Moreover, this habit will lead you to borrow from banks and other sources, every time you face a crisis, thus increasing your chances of falling into a debt-trap.

5. You Only Pay the Minimum Balance for Your Credit Card Bills

Many Credit Card companies offer the seemingly convenient alternative of paying just the minimum balance while carrying forward the remainder of the bill. While this may save you from paying a penalty fee, you must remember, that you will still be required to pay the interest of the due amount, which can be as high as 20% to 44% per annum. If you continue to pay just the minimum balance month after month, a debt trap is much nearer than you would like it to be.

We hope that you are now aware of some of the early signs, which suggest that you may be prone to falling into the ambush of an unending trap. It is best that you take the desired steps to rectify any of these issues at the earliest to enjoy a hassle-free and more importantly debt-free life!

Also Read: 5 Best Credit Cards for Salaried Individuals in India

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