5 DEBT TRAPS YOU SHOULD NOT FALL INTO
Economic crises and financial hardships often lead a person to borrow money and countless loans that eventually become hard to manage and keep track. Although we watch our spending and save money, we somehow thrust towards dealing with debt to avoid mounting debts and loans. It is better to manage our spending and add up to better payment plans to avoid unnecessary debts and loans.
To improve our financial situation, we need to understand how debt works and avoid some of the debt traps.
Deferred interest credit cards
Offers such as “no interest if paid in full within 12 months” are often seen while shopping with a new credit card or while opting for one. These are the deferred interest on credit cards. These offers can dump you in loops of interest and eventually can leave you paying a lot in interest if you are not careful. Using a deferred interest card, you will be stuck paying all interest that has ensued over the past 12 months if the interest amount is not paid within the deferment period.
How to avoid it:
This can be avoided by checking with the fine print to see if the credit card is deferred or not. If you happen to have a deferred card, make sure to have a payment plan to all of your dues and payments within the deferred period.
Using a credit card for daily transactions
As long as you pay your monthly dues within the specified time, using a credit card in day-to-day transactions is not necessarily a trap. However, if not careful, using credit cards can often lead to overspending and more debt. According to surveys and studies, we spend more using credit cards for payments than we would be by using cash for the same.
How to avoid it:
This can be avoided by checking with the fine print to see if the credit card is deferred or not. If you happen to have a deferred card, make sure to have a payment plan to all of your dues and payments within the deferred period.
Overdraft protection:
It is an option in which the bank prevents check, ATM, or debit card transactions, as well as wire and electronic transfers but still allows you to make any purchase — for an average fee of $35. Let us understand this a little better, you want to make a payment or buy something with your debit card, but you do not have sufficient funds in your bank account, now this could be a belabor with massive fees if you have overdraft protection. This worsens when people charged with overdraft fees tend to win multiple overdraft charges each year.
How to avoid it:
Ditch overdraft protection if your bank offers or suggests them. Also, you can always opt for bank accounts that offer fee-free overdrafts.
Long-term auto-loans
EMIs and monthly installments will assure you that paying every month is more manageable than paying within 24 or 48 hours for a product. Supposedly, you have your eyes set in a car, the dealer or the salesperson will always offer you the creative solution of monthly payments. This sounds easy but complex. Firstly, with monthly payments, you will be paying more in interest, which will mean you are paying more than the car’s actual worth, hence more likely to be underwater.
How to avoid it:
It is better to buy a car with a shorter loan term than being tempted to get an expensive car with a longer loan term. Else dive into your savings to get your dream car or save up to buy one.
Zero-interest financing
We wish to buy things, but sometimes, we cannot afford it for various reasons. However, there are ample ways where you can buy now and pay later. But being stuck at monthly payments on things you cannot afford is not a great idea. Also, racking up monthly payments and installments will damage your credit if the monthly payments are not paid within the speculated time. So, do you want to be stuck at monthly payments for something that is not needed? Think!
How to avoid it:
Why buy something now and pay for it over time? Ditch the monthly offers and payments instead, save up for a few months and then buy your venture!
If you are in debt, you can always approach a debt managing company. Debt management companies will help you understand your financial situation better and provide you with a better understanding of finances, debts, and how to overcome crises. These companies will help you pay off your debts by consolidating debts into a single monthly payment, which is then shared among the creditors. One such company is Credit my Debit that helps you pay off your debts and advises you better payment plans.
