In today’s world, where there’s easy access to credit, it is easy to fall into a debt trap, unaware of it. Understanding these signs and taking proactive measures is crucial before entangling in the suffocating grip of a debt trap.
What is a Debt Trap?
When you are stuck in a cycle of increasing debt, often struggling to make payments due to high-interest rates and fees, it’s known as a debt trap. It occurs when borrowing money becomes unsustainable, leading to more borrowing to cover existing debts. Recognizing the warning signs of debt problems before it’s too late to avoid falling into a debt trap is crucial.
7 Obvious Signs of Debt Trap
- Borrowing for Everyday Essentials
One of the first signs of falling into a debt trap is using your credit card or other forms of credit products for regular daily purchases, like groceries. Taking debt regularly for your day-to-day needs means you are in a tight cash crunch and must stop making unnecessary purchases.
- Exceeding the 50% Monthly Income Mark for EMIs
If you are splurging more than 50% of your monthly salary on paying EMIs of multiple loans every month, then it’s a sure-shot warning sign of an existing debt problem. We must remember that even small loans come with a heavy price tag as they all accumulate and make a solid debt trap.
- No Savings
Having sufficient savings and significant investments prepares you for any financial mishap in the future. If you need sufficient savings or emergency funds, you are paving your way into a never-ending debt trap.
- Taking New Loans to Repay Existing
Another warning sign that you have debt problems is taking new loans to repay the existing ones. While debt consolidation is one way to eliminate significant financial stress on your pocket, constantly bringing new loans to pay off the existing debts keeps you in a never-ending loop of a financial crisis.
- Unable to Pay Credit Cards in Full
If you fall into a debt trap, you may use your credit cards excessively for almost everything. This leads to exceeding the credit limit, where repaying it every month can be a significant pain. That’s when you only pay a minimum amount for the month, leading to more collected debt by the next month.
Further, the interest rate on a credit card is already a tough burden on you, and when you delay the repayments, you are only digging a hole for yourself. Hence, it’s best to keep the usage of credit cards limited and only get them out of your pockets in emergencies.
- Defaulting on Your Repayments
Not paying your credit card bills, the due personal loan EMIs, or other credit product repayments every month is a big sign of falling into a debt trap. Defaulting on every monthly payment can create an even more significant financial burden for the next month. With the late payment charges and high-interest rates added, defaulting repayments become an even more substantial burden, making it more and more difficult to pay off the debt.
- Loan Rejections
When you default on your repayments and have too many existing loans, it often causes a dip in your credit score, leading to more rejections for future loan applications. If no bank or lender is ready to give you a loan, then take it as a sign that you must solve your current financial situation or be prepared to fall into a debt trap.
Recognizing the warning signs of falling into a debt trap is crucial to avoid financial distress. These indicators should be addressed, whether it be excessive borrowing, consistently carrying high credit card balances, or constantly struggling to make minimum payments. Take action now and start building a solid foundation for financial success!