A good credit report requires you to pay all your debts on time. However, some end up falling into a debt trap. To avoid the situation, you need to understand the signs that show you are almost falling into the trap. Below is the key reason why people are falling into a debt trap.
Using a credit card when making ATM cash withdraws
Their charges on ATM cash withdraw via credit cards if the consumers do not know, they incur financial costs until they can pay the withdrawal amount. Moreover, the card issuers inquire about cash withdrawal charges of up to 3.5% of the withdrawal amount. Therefore consumers should stay away from ATM cash withdrawals through credit cards. If you find it hard to avoid the leaves, you should repay the whole amount on time.
Choosing to repay the minimum amount due
Those consumers think that paying the minimum amount due as indicated in the card statement will help them get finance charges. It is important to note that the repayment of the minimum amount due will only help you avoid the incurring charges and prevent a negative impact on their credit score. Those debtors will continue incurring costs on the unpaid debt.
Failing to repay the entire debt
Those ensuring the loans charge a certain amount each year. Moreover, they will go to the extent of withdrawing the interest–free period on the new credit card transaction until to settle the debt. The loan starts to accrue finance charges from the transaction day. Failing to service the loan for consecutive months can lead to an increase in the amount you owe the lender.
How to get out of the debt trap
There are those debtors who are stressed, wondering how they will settle the debt. The fact that there is repercussion that comes with failing to repay the loan has resulted in more people suffering. Several steps will help you with a solution on how to get out of the debt trap.
Identify the trap
You need to analyses the situation you are in for to avoid being in the debt trap. Always identify the area of concern and come up with a plan to solve the problem. A thorough review of the current study may help you answer the debt problems.
Go for debt consideration
In debt consolidation, you are given a chance to take a single loan and solve the others. Once you can consolidate your debt, you only have to think about paying only one loan without any stress. Moreover, debt consolidation will reduce the interest rates; hence the debt will not continue piling up.
Use your investments to service the debt
There are those people who invest in high return schemes, including bank deposits and chit funds. You may use them to reduce the debt; hence you will not find yourself in the trap. After settling the debt, you will not concentrate on rebuilding your wealth without worrying about the debt.
Avoid taking more debt
Once you apply for more loans to service your existing loan, you will be at the risk of increasing the chances of being in the debt trap. More debts may disturb your financial and mental health, and you need to avoid such a situation by ensuring you do not pick another loan.
Always have an emergency fund
Emergencies do occur, but it is hard to know when they will appear. Therefore you need to be ready for it by having a fund to solve it. The emergency funds should be of at least 3 and 6 months of the living expenses. If you have enough cash in your account to solve such a situation, you will not have to apply for a loan to solve an emergency occurrence.
Controlling your finance may help you avoid falling into a debt trap. Moreover, you will have financial freedom, unlike those who have debts. Those using loans to buy things should repay the loan and safeguard themselves from high-interest rates.
Jason is the Marketing Manager at a local advertising company in Australia. He moved to Australia 10 years back for his passion for advertising. Jason recently joined BFA as a volunteer writer and contributes by sharing his valuable experience and knowledge.