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Best 10 Tips to avoid falling into a Debt Trap

2 stay EmployedDebt Trap? Well this is the modern day trap that most of us fall into knowingly or unknowingly even without actually understanding its rear consequences.

But to be honest this is not only the fault of mismanagement of personal finance but the trending new lifestyles, new desires and things which were once a luxury becoming day-to-day necessities.

 

Credit in all forms is made available to us in glamorous packages and is marketed in such a way that it penetrates deep within our minds creating an irresistible craving towards them.

“Why not give it a try? After all I am definitely eligible for this”.  This is where the actual trap story begins.

 

Going in for a credit or a loan just because it is well within our reach is the first mistake that is made most commonly.

Getting in to a debt is not a one-day task, it actually demands most of your years repaying them. This not only keeps you indebted but also poses a barrier when you are actually in real need of a loan or credit.

 

How to Avoid Debt?

 

Avoid Debt –These two words would sound simple & easy but when you try to implement them, you would realize the actual hardship hidden. Why should we avoid debts when we are worthy enough to get approved of one?

 

This is one query that might arise when we speak of avoiding debts.  But wait give this a second thought. Why should you take a loan/credit when it is not really a necessity?

 

Taking a credit or loan and buying something, which we have dreamt of, might give the feeling of attaining success. But the in-depth truth is that this feeling is often short-lived and within you realize the truth, you would have fallen in the trap of debt. Taking a loan is in no way a sin, but analyzing the actual necessity of the loan is where the smartness lies.

 

What is a Debt Trap – literally?

 

This is a stimulustechnique that is made available to the customer who is basically the borrower, which actually make them fall prey to long-term commitments with hidden terms and conditions that make the borrowers nearly impossible to come out of these debts.

 

Getting out of a debt trap is not an easy task. We often discuss about the ways and means to get out of a debt trap, but that is the second stage, why not perform the first stage of not falling into a debt trap successfully. This could certainly prevent us from going to the second phase of discussions to clear the debts.

 

Now as we have equipped ourselves with some basic know-how of debts and debt traps, it is important to know about the various mechanisms and practices to avoid falling in to such debt traps and to protect ourselves from learning the lesson the hard way.

 

Here comes the TTT (Top Ten Tips) to avoid falling in to a debt trap.

 

  1. Use liquid cash only

When you use only cash for all your needs and shopping, you actually realize how much cash you are spending and this will psychologically make you spend less than spending with your plastic cards.

 

Also this will reduce the spending on your credit cards and thereby reduce your debts. Follow the golden rule of “Earn before you spend and spend only from what you have earned”.

 

  1. Never cross the limit 

Spend from what you earn, does not mean that you can spend all that you earn. It is very important that you save a portion of your earnings and make it a habit. This will one day save you from becoming indebted.

 

  1. Be savings – ready before you take a debt

If you have decided to go in for a loan in the near future, then start saving as much as possible from day 1 of your decision.  This will serve as the down payment amount and will reduce your loan to a great extent.

 

  1. Make note of your liabilities:

Always be aware of your debts and the amount that you are indebted. This not only gives you a clear picture of your financial status but also limits you from entering into further debts.  Develop the habit of making a detailed note of your creditors and the amount you owe to them respectively.

 

Don’t just swipe your credit card just because you are not going to pay liquid cash. Swiping a credit card for your expenses is worse than paying from your pocket with ready cash, because interest accrues on the amount spent and the debt amount rises rapidly with hidden charges.

 

  1. Minimize the number of your credit cards:

Having a number of credit cards is not a matter to be proud of, it only makes you all the more indebted and your chances of falling in to the debt trap certain. Try managing with one card and use that only in cases of real emergency.

 

  1. Surrender your extra cards: 

Having a number of cards in your pocket, means you are going to be all the more tempted to use them on unnecessary expenses. Human mind can never be satisfied. So it is a wise move to surrender all your extra cards and help your mind be in control.

 

  1. Convert your debts into EMI’s:

Once you have decided to surrender your cards, you might be required to settle the balances on them. So it is better to consolidate all the balances and work out a reasonable monthly installment repayment plan and settle the dues as soon as possible.

 

  1. Pay your Bills on time: 

Make it a habit to pay all your bills on time and as far as credit cards are concerned, don’t just pay the minimum amount due but clear off the entire amount due by each month. This would prevent the balances accumulating and interests being accrued and your debts increasing. [PDF]CHAPTER 7 ACCOUNTING FOR RECEIVABLES

 

  1. Never use your savings to pay your credit cards:

Credit card payments are to be made from your earnings and not from your savings. You should not allow your balances exceed the permissible limit. If it ever happens, go in for settlement options through EMI’s. But never ever break your savings to pay for your credit cards.

 

  1. Pay your dues evenly over all your loans:

While paying off your debts, ensure that you pay all your debts in an evenly spread portfolio. Make sure that your DTI ratio doesn’t get affected.

 

Today we have a scenario where in most of the educated youth are often stuck in unmanageable debts. This may be to the student loan debt that they would have utilized and other debts that they would have accumulated over the years. The whole picture is even coined as “Generation Debt”.

 

2 Avoid DebtWhen we look at the general facts about Student loan debts, we would be rather shocked.  A recent report reveals the following facts:

  • The total U.S. Student Loan Debt touches a whooping $1.26 trillion
  • The number of Americans with Student Loan debt stands at 43.3 million
  • The delinquency rate of student loans is at 11.6%
  • The Average and Median monthly student loan payment for students aged from 20 to 30 years stands at $351and $203 respectively.

 

To make things more precise, the average student who graduates will have an enormous $40000 as his student loan debt. But this can be dealt with in a wise manner.

 

What are the options to reduce student loan debts? 

  • Make sure you put the option of grace period to maximum use. Start saving the installment amount right from the beginning. Just because you are not required to pay during the grace period it does not mean that you could spend the money unnecessarily. You can later use this saving to pay a down payment for your loan after your grace period, thereby reducing your debt levels.
  • Do a thorough research of the details of the loan and its features. Get to know who the exact lender is? How much is your outstanding? What are the available repayment options?
  • Once you are done with ample research, now it is time that you choose a suitable repayment option that best suits your income and lifestyle patterns. Also consider loan consolidation to ease your payment process.
  • Adapt a simple lifestyle, well at least until you come out of your debts. Live simple and spend as little as possible. All these little sacrifices are really worth your debt-free and peaceful future.
  • Formulate a budget and learn to stick to your budget.

 

Scholarships & Grants:

There are a lot of scholarships and grants offered to students who pursue their education and help them in reducing the loans that they apply for. But there are students who don’t become eligible to such forms of scholarships or grants, or sometimes their education costs exceed the grant amounts, forcing them to go in for loans.

 
There are no such grants and scholarships to repay the student loans. However, the student loan debts have to be repaid and there are a lot of options and ways by which this can be done.

 

  • PSLF (Public Service Loan Forgiveness) – If you happen to be working in a public sector, your federal loans may be forgiven after 10 successive years of payment. This is possible if you are a full-time employee in a government sector.2 Scholarships and Grants
  • Employment – based Opportunities – Depending upon the type of employment you choose, you might be eligible for such programs wherein a portion of your loan gets forgiveness or you receive grants and awards for your services. Such professions include Doctors, nurses, attorney’s and Teachers
  • IBR – It is the repayment plan, which is based on your income structure. This helps you program your monthly payments according to the income you earn.
  • Peace Corps – If you volunteer with Peace Corps for a period of 2 years, your Perkin’s Loan might be partially forgiven and if with the extension of your volunteering service, the forgiveness amount would also increase.
  • Americorps – If you are a person who wants to work for a social cause in resolving community issues, working with Americorps is the best option. You not only get to realize your dreams but also receive stipends, rewards and grants.
  • SponsorChange – This is a platform that provides opportunities based on your skill-sets and in exchange for your skilled labour, they offer to pay your student loans.
  • Zerobound – This is actually a crowd-funding platform wherein you volunteer for a campaign and the sponsor’s pay each volunteer according to their talents.
  • Givling – This is also a similar crowd-funding program like Zerobound. Once you register, you have to wait for your turn to get your loans paid off.

 

All these options come as a boon to students who are stuck up with student loan debts. Though these are not official grants, you can rely on them to help you to reduce your student loan debts.

 

Inference:

It is an undisputed truth that in this fast- paced world desire-driven world; people often tent to fall prey in to the so-called debt trap. It is our duty as responsible individuals to stay on vigil and carefully monitor our lifestyle patter.

Always have in mind the often-neglected proverbs – “Look before you Leap” – “Think Twice before you act” – “Slow and steady still wins the race”. All these proverbs are sure to give an in-depth insight about the reality of life.

Formulate a more disciplined life style and spending pattern. Only spend what you have earned. This not only means that you will be out of debt but also this acts as a psychological barrier to spend more, because you know how hard it is to actually earn that money.

Always stay employed, don’t wait for that dream job or that perfect job. No doubt you will get to it one day, but in the meanwhile keeps yourself self-sufficient by staying employed. Only that will help you to avoid falling into a debt trap.

In most cases, the biggest opponent you encounter is not your financial inability, but your own mind that is in all means alluring to spend more. While winning over your adamant mind is really a tough task, always remember contentment is the key to live debt-free and in ultimate serenity.

 

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