The debt trap is a burdensome thing to handle. It takes place when you are unable to repay your debts on time, or when there is a huge overdue amount to be paid. One needs to take a fresh loan in order to repay the existing ones and in this way, the outstanding amount keeps on accumulating. There comes a point when these outstanding loans become so huge that it is impossible to get out of the debt traps. Debts can also have a huge impact on your credit score. It keeps on falling as the debts grow in size.
To avoid this, it is very important to manage your finances in the best possible manner. Here mentioned are some of the best ways by which you can avoid debts.
Set up a budget and make a financial plan:
It is essential for a person to know income and expenditures. Knowing how much you will be able to pay every month will help you to stay out of debt. It is important to have a financial plan for establishing how much income is available and knowing your expenses. Make short and smart goals as far as budget setting is concerned. Initially, you should start with $1000 and once you reach this goal, you can increase the amount to $5000. This will give you enough protection to cover the most expensive home or car repairs. The more money you have to cover these expenses, the less likely you are to go into debt.
Financial experts says that ‘a budget should be considered as a rule book to follow. It is impossible to stay on track until and unless you have an idea of how much money is coming and going.’
Stop creating more debt:
When the outstanding amount becomes enormous, people have to take loans in order to repay the existing loans. The result is that you just keep on adding more and more debts. This point is a continuation of the first one. When you have a budget with you, it gives a hint of how much you are capable of repaying every month. Though it won’t help you in getting out of your liabilities, it will prevent the debts from accumulating further.
Credit cards are one of the biggest enemies and they tend to create more and more debts. Initially, it may be an exciting option to finance your lifestyle, but you have to pay a big price in the long run. So, it is very important to limit the usage of credit cards and loans.
Increase monthly payments:
The debts can be cleared easily if you increase the amount of your monthly installment. You will have to pay more interest if you choose to pay less for your debt balance.
Have an emergency fund:
Several circumstances can take place in your life- you can lose your job or there can be medical emergencies. All you need is a good amount of cash in order to deal with it. So there will be emergencies in your life for which you need to have sufficient funds. Never use your emergency fund for repaying your debts.
It might sound awkward to have an emergency fund especially when you are trying to get out of these debt traps. But when you create an account for emergencies, it can save you from more debts.
This point is very relevant to the current situation that we all are facing. The nation is under complete lockdown due to the coronavirus pandemic and many people are losing their jobs. However, everyone needs to have a proper income to support their families. During such situations, these emergency funds will help in repaying the debts and it will prevent you from taking any new loans, thus saving you from debt traps.
Important note: An ideal emergency fund should have an amount that would suffice you for the next 10 to 12 months.
Ask your creditor to lower the balance:
If you are charged with higher interest rates, excessive money will go out in paying these interests and not the principal amount. However, the rate of interest can be easily negotiated with the creditor and you can request them to lower it. However, this will completely depend on the discretion of the creditor. You are eligible for a lower interest only if the creditor is ready to do so.
Usually, the ones with a good credit score can make negotiations with the creditor and the individual can be considered as eligible for getting lower rates.
Reduce the number of cards that you have
Credit cards can be the biggest enemies because it creates an illusion that one can buy more and more things, but in reality, it means that if you are unable to buy something in cash, you cannot meet the expense with a credit card either. There is a need to have limitations on the number of cards that you have. Having numerous cards would mean that you have to pay multiple payments. Irresponsible use of cards would lead to debt consolidation. When you have too many cards to handle, it becomes difficult to keep a track of the payments and the expenditure.
Settle with your lenders
Debt settlement is one of the best ways to repay money to the creditors. This is a solution in which you have to pay less than what you owe. You have to pay a lump-sum amount for settlement of your debts. However, this is also subjected to the discretion of the creditors. If the creditor feels that the borrowing party is at risk of default, then they might accept this offer.
Buying unnecessary and luxury items have become a new fascination of the modern society. People are using their credit cards in an indiscriminate manner. Debts can be avoided only when you know how to resist and control your temptations!