8 SIGNS THAT SHOW YOU ARE FALLING INTO A DEBT TRAP.

1+
  • EMI’s exceeding 50% of income – A lot many people fall prey to ‘easy EMIs’, ‘discounts’, and ‘sales’. Compulsive spending can strain your finances and push you towards a debt trap. “Some or the other sale will always be on and people who can’t control themselves often end up buying things on EMIs.
  • Fixed expenses more than 70% of income – EMI is only a part of one’s fixed obligations. There are several other fixed expenses — rent, society maintenance charges, kids’ school fee, etc. Ideally, the fixed obligations-to-income ratio (FOIR) should not be more than 50%.
  • Loans for regular expenses – If you often find yourself borrowing money to meet regular expenses, you need to set your house in order. If you have to borrow regularly to meet routine expenses — rent, kids’ school fees, etc. — you may be sliding into a debt trap.
  • Loan to repay a loan – Borrowing money to repay a loan, unless it is aimed at reducing one’s interest outgo as in the case of changing one’s home loan lender is a worrying sign. Another worrying sign is the way people deal with their fixed obligations.
  • Withdrawing cash from a credit card – While borrowing for regular expenses to repay loans is bad, doing that with the help of credit card is a sure way of getting oneself into trouble. “Even if you want to borrow, decide on the kind of debt. Using the credit card route should always be avoided. Via credit card invites a chunky cash advance fee — 2.5% – 3.5% of the withdrawn amount per month. Annually, the interest works out to be 35% – 50%.
  • Not clearing credit card dues – Not clearing the credit card dues in full is a huge red flag. Our survey shows that this practice of not paying the credit card bill in full is quite rampant. Almost 21% of the respondents have either missed the credit card payment or rolled it over by paying the minimum due amount over the past year.
  • Missed utility bills payments – Missing utility bills once in a while is not a warning sign. However, if you are frequently missing paying utility bills, you may be spending beyond your means, and it’s a red flag. It also indicates lack of financial literacy — the fact that this will impact your credit score and may keep you away from low cost funding options.
  • Borrowings based on future income – If you decide to take a loan now and aim to repay it when you get a fancy bonus later this year, you may be in for trouble. People always hope for the best and don’t factor in possible problems that may emerge in the future. So, borrowing based on current salary is fine, but not on expected bonus, increments.

1+

Leave a Comment