What is a Debt Trap in a credit card?
One of the main issues affecting people financially is falling into a debt trap. Getting into a debt trap is a serious issue and once they enter into it, it may wreck their peace and well-being. The main problem with debt trap is you wouldn’t even realize it till the debt is neck-deep. For repaying the loan, people will have to take a loan again. It is important that you take sufficient measures to avoid falling in a debt trap. IN this blog, we will highlight the possible reasons for falling into a debt trap and the ways to avoid them.
Not understanding the root cause of debt trap
The worst part about falling into a debt trap is trouble in getting to the root cause of it. Knowing the exact reason for your growing debts can help you change your spending habits. In order to get out of a debt trap, you will have to identify the root cause of it, and make sure you do not repeat the same mistake twice again.
You can do the following to find what caused you debt trap,
- Go through your credit card statement, bills, receipts
- Get a detailed breakdown of spendings every month so that you will be in a better position to Control your spending habits
- Once you’ve identified the root cause of your debt trap, you will have to address the issue that led to it first place and make imminent corrects to your spending.
Credit Card Spendings
Credit cards are the main reason, why a lot of people fall into a debt trap. Using credit card is not necessarily bad. However, not paying your monthly credit card dues or late payment of dues can cause serious financial troubles. Remember credit card are financial products with the highest rate of interest (upto 43%), If you do not pay the amount in full, then the credit card company will levy an interest from the date of purchase. So, do not use your credit card if you are unsure of repayment date. Credit card usage may become an addiction if not moderated properly and can lead you into serious financial trouble. Hence, own a credit card only when you can spend prudently.
Have a Repayment plan before you borrow
Whether you are using a credit card or availing a loan, it is important to have a repayment strategy. Use an EMI Calculator before you apply for a loan, you will get to know the exact EMI that you ought to pay the bank. You will know how much you will have to cough out every month towards your EMI. Remember borrowing is easy, but when you do not have a proper plan for repayment things can go haywire.
Lack of research
In a hurry for funds, people choose a lender without proper research. It is a serious mistake and cause you to fall in a debt trap. Whenever you would require a loan, you must do a proper research.
- Compare loan interest rates from multiple lenders using a site like Fincover
- Research well in the market
- Dont exceed your borrowing capacity
Defaulting on the payment
In case of credit cards or loans, defaulting on the monthly instalments or dues can cause debt trap and also affect your credit score. Borrow as per your capacity and be timely with your repayments.