Using credit cards and availing loans is a part of life and no one really treats it as something that may land us in trouble. However, excess use of anything may make you pay through the nose. Too much borrowing may lead you to a debt trap.
Here are some symptoms that indicate that you are in a debt trap.
Your income goes to repay loans
You should ideally be using not more than 30% of your monthly income to service your debts. In case of good loans such as education loan and home loans this may further be relaxed to 40%. However, any number more than this is an alarm bell.
If most of your income goes to service debt, then you have to borrow more money to pay for your consumption. This can worsen the situation, ultimately pushing you into the debt trap.
You are borrowing to fund monthly expenses
You should have enough income by way of salary, pension, business profits or some other passive income such as interest or dividends to pay for your expenses. If you have to borrow to fund your monthly expenses, then you are in serious trouble. It is a sign that your very existence is dependent on borrowed money. Either you cut your costs or try to find out more means to earn money.
You are unable to pay credit card dues
It speaks for itself. Credit card dues are the costliest loan in most cases. If you can’t repay the bill in full, then you are nearing debt trap. If you find it difficult to pay your credit card dues for a month, then you can come out, albeit after paying high charges. But if you are finding it difficult to pay off credit card dues for many months, it is time to take a hard look at your finances.
Borrowing to repay existing loans
Balance transfer is seen as a sign of financial smartness. Many look for transferring outstanding from one card to another for a ‘small fee’. This may give you a temporary respite as you ‘buy’ more time to pay off your credit. But if you keep doing this for months, then you are about to land in debt trap. “Borrowing to repay existing loans happen when you have over-borrowed or there is a sudden drop in your income. It is an alarm bell for you,” says Jitendra Solanki, founder of JS Financial Planners.
The worse situation is every additional loan you avail, comes at a higher rate of interest, pulling you down into the debt trap. “At this juncture if the mix of loans against your name is heavily tilted in favour of unsecured loans, then there is a high chance that you will soon land in debt trap,” says Jitendra Solanki.
No bank is offering you a loan
This is the ultimate sign that you are in a debt trap. Banks do check your credit report before lending you money. If they find out that you have borrowed to the hilt, the bank won’t extend you additional credit. That makes you scout for unorganised channels for more credit, which comes at much higher rates compared to that offered by banks.
“In most of the cases individuals end up borrowing too much because they ignore their repaying capacity and the cost of funds,” points out Vinayak Savanur, founder of MoneyMintingMantra. If you find any of the above mentioned situations in your life, it is time to act swiftly to get out of the debt trap. “Start repaying high cost loans first,” Savanur adds.