If you have come to the state where you have started feeling that your finances are overpowering you, then it is time for you to check if you are facing any of the signs below. If one or more than one scenarios seem to describe your current state, a debt trap may be welcoming you. A debt trap means that you may be holding a debt that exceeds 40-50% of your one month’s salary, and it indicates that you may not be able to cope up with payments in the long term.
Many of the people out there tend to fall prey to the easy EMIs, sales, and discounts in the market. It is essential for you to remember that compulsive spending can cause a burden on your finances and lead you to a debt trap. These days in the market there is always some sale that is going on, and some people just cannot control themselves and end up making the purchase on EMIs. These standalone EMIs may not seem like a big amount, however, when accumulated, you may end up with a very little budget to spend on other things.
In order to have strong financial health, it is extremely important to plan for the future, as important as staying comfortably in the present. If you end up saving nothing from your monthly income, you may find yourself to be in trouble. This habit can restrict you from building wealth and from fulfilling financial goals such as buying a house or planning for a child’s further education. This habit also leads to you turn to borrow and increases your chances of falling into a debt trap.
If you are paying only the minimum amount of your credit cards, it is an indicator that you are being led towards a debt trap. Just paying the minimum amount ends up costing you interest charges, this interest is charged on your entire amount and not the amount that is due. It is always advised to pay the entire amount instead of the minimum dues so that you can save yourself from any additional interest charges.
Borrowing money in order to repay an existing loan, unless it is reducing the overall interest charges, is a sign of worry. This also leads to a larger number of loans to service, which can lead to a debt trap.
It is not a good idea to borrow in order to fund your regular daily expenses, even via credit cards. This is a sign that you are getting yourself into some real trouble.
A cash advance on credit cards usually comes at a huge cost and can be probably the worst thing you do to your finances. Usually, they come with a fee along with some interest charges. So, whenever you are faced with a situation where you have to resort to the cash advance on your credit cards as a mode of financing, it reflects your financial condition and should be a sign of worry.
Banks often rely on one’s credit score to assess his or her repayment capacity. If a bank is rejecting your application, especially because your credit score is falling, it can be an alarming sign of a debt trap arriving.
If you are missing the payment for your utility bills once every now and then, it is not uncommon and definitely not alarming. However, if you have been facing such a situation on a frequent basis, it may be reflecting that you are spending beyond what you can afford, and that definitely is a red flag. It is also an indication that you lack financial literacy and can hamper your credit score.
Nobody likes to face a situation where they have fallen into a debt trap. Which is why it is important to check for these signs every now and then. It is always better to be safe than sorry!