Introduction
There is nothing quite like facing your enemy which is in this case debt as it exerts a lot of pressure in the lives of those who have it. For many, it begins with paying a little late on a credit card or a bill, and then it spirals downwards out of control and becomes very difficult to deal with. Learners will be able to come across this article and learn the most common debt pitfalls, along with tips on how to avoid them.
Common Debt Traps
1. High-Interest Credit Cards
Interest only credit cards are often the reason for debt trouble. These cards normally have as high an interest rate as 20% or more, and if this is the case, your balance will increase rapidly if you don’t pay it in full. When using the minimum amount due for payment each month, it will take several years to complete the balance and one is likely to be charged thousands of dollars in interest.
Solution: To avoid falling for this, it is advisable to pay for the balance on your credit card every month and do not balance it. Do you often forget about some of your due payment? You should look for ways to automate payment or get regular reminders. Moreover, do not fail to compare various credit card companies so that you are able to get one that charges low interest rate. It can also mean that if your credit worthiness is good, then there is every reason to apply for a credit card with a lower interest rate.
2. Predatory Lending
High interest credit families like payday lenders or title lenders supply loans mainly to the susceptible community members while employing forceful marketing strategies. It is reported that this type of loans can lure borrowers into a vortex of debt as they will borrow more loans to clear prior debts.
Solution: To countercheck with predatory lenders, the lenders and loans should be researched before getting a loan. Try to work with the most trustworthy and legal loan companies that don’t attempt to persuade you to agree to high interest rates and charges. If you are encountering some issues with your finances, perhaps it is best to go to a non-profit credit agency for help. These agencies can assist in formulating the right strategy on how to deal with debts and unnecessary forming from some unsustainable organizations.
3. Impulse Spending
Bearing in mind that impulse buying is a habit of purchasing products with little or no regard for the likely outcome it also leads to debt. Superfluous expenditure is always detrimental to an individual’s economy, keen spending on credit cards included.
Solution: If you want to avoid overly spending, then make a plan on how you would want to spend your money to be disciplined. Part of your self-control plan should be to figure out what tends to make you drop your guard and guides you to spend more money then you can afford, just avoid such things. For instance if you normally indulge in buying clothes on a whim, then try to save money for the specific clothes that you wish to purchase. When applying credit cards do not use small or irrelevant items in the credit card since they accumulate without your knowledge.
4. Living Beyond Your Means
In this case, living in life beyond your capabilities financially will be a major cause of indebtedness. Some financial mistakes may include, borrowing more than you can afford, not saving for an emergency, or not planning for the future.
Solution: In an attempt to go further than this but not indebted, make a budget and stick to it. The first step towards credit repair is understanding your financial position by determining and comparing your income, expenditure, and liabilities, before coming up with a way of eliminating or gradually clearing your liabilities, and saving for rainy days. Is overspending a difficulty? You can avoid this by learning how much you are spending on various things in a particular month and looking for ways you can reduce the amount you spend on them. In case you are having a problem maintaining to a budget then you should consider consulting a financial planner or a financial expert.
5. Not Having an Emergency Fund
With no working emergency fund, there are high chances that you’ll find yourself in debts whenever an expense is out of the blue. This can range from accidents or an illness that needs medical attention to car breakdowns or, worst, loss of employment. If one does not have adequacy capital reserves, then such expenses will help drains their savings and lead to a debt.
Solution: To avoid falling to this trap, save and create an emergency fund that will cater for 3 to 6 months of your income. This has the added advantage of ensuring that when you have unforeseen bills to pay you do not have to borrow money thus digging yourself into a deeper hole. Some people find it hard to save for an emergency fund; the best thing you should do is create a small sum that you should save incrementally monthly.
6. Co-signing Loans
Becoming a co-signer for friends or relatives is considered a dangerous option, which can put one into serious debt. Inability to pay for a borrowed amount might affect credit score and one’s financial status.
Solution: To do this, makes sure that you do not fall for this trap by being very cautious when co-signing a loan. Make sure you understand all of the terms and conditions that apply, and know all the possible risks associated with such schemes. If you opt for co-signing ensure that you have agreed on how the debtor would be expected to pay the money back in case he/she defaults. Also, to avoid distending the credit risk, it is advisable to let the borrower communicate his or her progress to the Lender independently and monitor periodically his or her payment behavior.
Conclusion
While debt in its various forms is not easy to manage it is also not impossible to avoid if one is equipped with information on the pitfalls to avoid. It is only possible by making smart choices on how you spend your money and earn, avoiding going into debts, and if you have to borrow, look for a helper who will guide you on what to do.
