7 things to avoid, if you don’t want to fall in the debt trap

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“Debt is One Party’s Liability, and Another Party’s Asset”

During the period of our ancestors, paying off debts was practiced traditionally. Debt for them was equivalent to society's judgments. The easiest way for them to recover all their debts was to use their savings. They used to save their income first and make suitable provisions before indulging in any type of expense. However, in today‘s time, due to unnecessary expenditures on our wants & desires and easy access to credit cards, people have forgotten to save a portion of their income.

The habit of overspending has coupled with the lesser savings and encouraged them to opt for unsecured loans. Such footfalls have made them liable to debt default. To fulfill these debts, most people fall into the debt trap due to the financial crisis. Let us all see 7 things to avoid, if you don’t want to fall in the debt trap.

Here is the list of 7 things to avoid, if you don’t want to fall in the debt trap.

EMIs exceeding 50% of income

EMIs towards home loan or car loan are part of a normal individual’s life these days. However, keeping a healthy ratio of less than 50% of EMIs outgo with your income is preferred. If your outgo towards EMI’s is more than 50% of your current income, then it’s a major red flag and needs to be addressed immediately.

Fixed expenses more than 20% of income

We generally also have fixed expenses other than fixed EMI’s like children school fees, rent payment of property tax etc. The ratio of fixed expenses should never cross 20% of your total income.

Loan for regular expenses

If you are someone who needs to look towards credit lending companies even for your regular expenses like payment of utility bills, rents, or children's school fees, then it's high time that you realize that you need to put your financial affairs in order and keep your spending in check.

Withdrawing cash from credit card

Many credit card companies lure you into making these types of withdrawals, wherein they will nudge you by sending mailers and bulk SMSs informing you to avail this facility. This type of withdrawal usually attracts a very high amount of processing fee and interest rate charges. Hence, this is a sure shot recipe for disaster and will definitely lead you into the debt trap abyss in no time.

Using revolving credit facility on credit card payments

Why do you think credit card companies give the facility of paying less than 5% of your total outstanding amount on your credit cards, because they want your outstanding to remain substantial month on month, so that they could earn huge interests’ payment which usually are in the range of 35 to 40% per annum? Hence it is always advisable to pay your outstanding amount in full on every due date.

Buying gadgets on ‘easy EMIs’

Pressure from peers and friends on social media showing off their exorbitant lifestyles and latest gadgets have made us the servants of our desires. Which we may not be able to fulfill at our current income levels. As a result, we tend to buy gadgets on ‘easy EMIs’ which itself is not a significant amount, but when coupled with our other fixed EMIs and regular spends may become a major headache for us.

Loan to repay a loan

This is the worst type of financial situation for any individual since this type of behavior is akin to putting our current financial problems under the carpet. If you are exhibiting this type of behavior, you are sure to slide down towards the slippery slope of debt trap.
However, taking one loan for repaying another loan is advisable in the case of secured loans like car or home loan wherein there may be a scope of interest savings compared to our current lender bank.

Disclaimer

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. City Credit Management LLP is not liable for any decision arising out of the use of this information.

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