It doesn’t take too much time for a loan to become a debt. With the ease of financial assistance and availability of loans, it is easier to fall into the debt trap. The debt trap becomes unavoidable if one lacks financial discipline. People who fall into the debt trap are often irresponsible borrowers. Borrowing without financial planning could result in overwhelming debt, start to overpower your life and pull you into the debt trap. But are there any early signs of debt trap?
Most of us are not even familiar with the term financial planning. As alien as it sounds, once you start to earn, managing your finances becomes essential. Usually, the chances of falling into the debt trap increase if you do not plan your finances. Though there are no hard and fast rules to find out if a person can fall into the debt trap, there are apparent signs which indicate its possibility.
Check out the early signs of debt trap below:
EMIs exceeding 50% of your income
Taking credit is unavoidable nowadays. Most of us have easy access to credit cards and financial institutions, and we end up buying things on credit. It increases the financial burden. Irresponsible spending behavior or maxing out your credit card can lead to spending more than 50% of your income on paying credit card bills and EMIs. If you spend more than half of your income on paying bills and EMIs, you are nearing the debt trap.
Expenses more than income
Spending more than your income might sound bizarre, but many people go through this challenge. It usually happens when your income goes toward your debt, and one uses their credit card for monthly expenses. In this situation, even though you are trying to pay off your existing debts on time, you are still adding more to your future obligations. It means that you will not be able to get out of the debt cycle soon.
Little or no savings
Savings are the backbone of your financial stability. To have a secure financial future, you must save at least a small part of your income. Ideally, you must have at least six months of your income saved in an emergency fund account for any emergency you might come across. In case of an emergency, you will borrow money from a friend or a financial institution which would further drag you into the debt trap.
Paying the only minimum due toward your credit card
While going through a financial struggle, a person’s first instinct is to start paying minimum due instead of their total due amount. The minimum due is 5% of the current balance. Though it is manageable, it has a severe impact on your credit score. In addition, when you pay the minimum due on your credit card, you start to pile up your credit card debt until you max it out. Paying minimum due eventually lands you into a debt trap and is a sure sign that you will land into a debt trap.
Borrowing more to repay existing debt
Most of us believe that borrowing money to repay existing debt is the easiest way out of the debt trap. Still, it eventually pushes you closer to the debt trap. Unless you are taking a loan with a reduced interest rate, borrowing more money to repay your existing debt will surely push you into the debt trap.
New loans’ application rejections
Many people turn to borrow more to repay their existing debt. But suppose they have already applied for multiple loan applications. In that case, there are chances that the bank will reject the new applications. Having various loan application rejections signifies that you are in urgent need of money. Still, the lending institutions do not lend you money due to a low credit score or too many inquiries. Too many credit inquiries have an acute impact on your credit score, which pushes you towards the debt trap and affects your credit health.
So, what should you do?
There is a thin line between good debt and bad debt. Debt can go bad due to financial hardship and financial mismanagement, which might push you closer to the debt trap. A debt trap is avoidable by all means. We have mentioned the early signs of the debt trap above so that you can keep an eye out for them. If you are already facing one of the challenges discussed above, you might need to track your finances and find professional help to streamline your financial situation.
Are you looking for a debt relief measure to get out of a debt trap?
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