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Debt Traps: The Warning Signs

By: Donna Chaffins | Date: February 12, 2018 | Categories: Money Talk

Debt traps. Almost everyone is in debt in some form or another these days. And because of the prevalence of debt in the modern world, it can be incredibly difficult to determine whether or not your debt is turning into a big problem.

However, there are a lot of warning signs to watch out for that can tell you that you’re on the road to big financial problems – and it’s important to understand how to spot them. Let’s get into the finer details right now in this guide to seeing the warning signs of debt traps.

Debt traps warning signs.

Debt Traps: The Warning Signs

An over-reliance on credit cards

Do you have a habit of using your credit cards for normal, everyday payments? If so, it’s a sure sign you have a big problem – and it’s important to quit the habit.

The convenience of using credit cards for day-to-day spending is clear for all to see, but there is a cost involved.

Ultimately, it’s you that will pay for it – either at the end of the month or over a lifetime of huge interest payments. Avoid making unnecessary purchases on a credit card and try to learn the art of being frugal.

Using loans for unnecessary purchases

Of course, credit cards are only part of the story – loans also play a huge role in making people’s financial lives difficult. As a rule, mortgages and car payments are OK, as they are investments and a tool to helping you make an income.

But if you are getting loans to pay for unnecessary things like vacations, gifts, or the latest gadgets, the truth is that you are asking for trouble.

The rule to follow is simple – never take out a loan to buy something that isn’t necessary and that you can’t normally afford.

Maxing out your credit

When a bank or credit card company lend you money, it’s not a green light to spend everything they offer. Far too many people see their credit as a maximum amount to spend and fail to understand the problems that go with it. The truth is that once you reach your borrowing threshold, it’s a signal that you might need debt relief.

Not only will you be unable to borrow any more money, but you will find that your credit score takes a hit, which in turn increases the cost of your borrowing.

Borrowing not saving

Are you working month to month, paycheck to paycheck? If so, it’s a big sign you are struggling with your finances. A good rule to aim for is to keep aside 10-20 percent of your monthly income as savings, to give you some kind of stability.

And those savings should be split into pots, too – some go towards a rainy day fund, and the rest should be put into an emergency fund to cover you for any of life’s disasters.

debt traps

In simple terms, if you are unable to save any money and are borrowing to pay for emergencies and day-to-day spending – you have a big problem.

Be very wary of any of these issues arising with your finances. Debt traps can be incredibly easy to fall into, but incredibly difficult to escape.

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