WHAT ARE THE SIGNS OF GETTING INTO A DEBT TRAP HOW CAN YOU COME OUT OF IT
Harry June 8, 2022

For a significant section of people, specifically who live paycheck to paycheck, debt is unescapable. But borrowing imprudently can land you into colossal trouble.

Some debts are good, like house loans, car loans, and education loans. In addition, people who don’t qualify for a loan from a reputed institution due to lower credit ratings for them. Taking payday loans for bad credit with no upfront fees is not considered bad debt because their circumstances and especially credit score didn’t give any other option.

Many people take on debts due to unavoidable financial emergencies. But some accumulate more debts as they live beyond their means. In both scenarios, you are increasing your debt and burdening yourself with additional interest along with the principal amount. If you keep doing it, you will soon get into a debt trap.

A debt trap is an outcome of insensible borrowing without realizing actual income to repay. Loans are the easiest and preferred medium of fulfilling a dream that cannot be met with own pay. 

What are the types of debt traps you should avoid getting into?

Many services and products assert to provide relief from numerous debts. Some might do it, but mostly, they are debt traps. These fake promises and debt traps can make your financial miseries even worse.

Here are some of the popular debt traps which you should avoid getting into.

Credit cards

You should consider credit cards as a double-edged blade. It can help you when you need immediate money, but if you fail to manage it the right way. They are highly capable of making your financial woes worse.

You end up paying exorbitantly for the following.

  • Late payment charges
  • Over the limit charges
  • Balance transfer charges
  • Annual card charges
  • Cash advance charges

You need to go through the credit card agreements thoroughly before signing in. Ensure timely or pre-payments.

Bounce protection

Bounce protection or overdraft protection provides payments from checks to a particular limit. Suppose you lack sufficient funds in your account during that time. You can also use your debit cards or ATMs to tap into it.

It shows that it’s done free, but the overdraft charges can be more than £35. Most banks demand this fee that has to be paid back in a month. Therefore, beware before opting for this one. Make sure that you have read all the terms before agreeing to it. Bounce protection is a discretionary feature. You can always opt-out.

Mortgage refinancing

Whenever you see a fall in the interest rate, you might be tempted to refinance your house mortgage. As the amount of your monthly instalments will also go down, you will have some additional cash with you, right?

You are wrong. There is an eligibility criterion to qualify for it. The foremost one has an impressive credit score. Even after qualifying for it, you are supposed to pay lower amounts for so many years, which can go up to 30 years.

Pawnshop loans

Pawnshop loans are designed for those individuals who are looking for immediate financial solutions. These are generally short-term loans that claim to provide quick fixes to people in urgent money needs.

Kindly note that they have their own terms and conditions. Additionally, they take a piece of your asset or precious jewellery as collateral. You not only get half of its actual worth but also put your belonging at a greater risk of getting sold if you don’t pay the borrowing on time.

Moreover, the interest involved in such loans varies from 2 to 25%, with a tenure of 1 month to 60 days.

Home equity loan

This type of loan can cause a serious danger to your financial well-being. Home equity loans are mostly secured loans where your house is taken as collateral security. This can actually make you lose your own house. Some deceitful lenders even wish that you miss your repayments so that they can take this most worthwhile asset of yours.

Suppose your current financial situation has gone bad due to overspending. Then a home equity loan can worsen your circumstances because this asset can give you access to huge amounts of money.

Credit repairing

You do not require paying a single penny to repair your credit rating. It cannot be improved or repaired by anyone. If you find errors in your financial report, then correct them yourself.

The easiest way to improve your credit rating is to pay your bills on time or at least with a minimum. If the credit score is telling the truth, then you cannot erase it. Make consistent bill payments and avoid skipping the repayments of any debt.

Summary

Accumulating debts is effortless, but getting out of it can make you drag financially. The best way to avoid debts is to learn how one can fall into this trap.

Many services claim to help individuals who need financial assistance during an emergency. But these often upsurge the existing money problem.

We are not asking you to stop using credit cards but to do it sensibly. Use an online repayment calculator when you opt for mortgage refinancing. Overdraft protection is a helpful feature but never think it comes for free.

Lastly, never opt for removing credit stains from your financial history, as nobody except you can do it.