Today’s generation has a lot of disposable income available for spending. This in turn has led to an increase in spending recklessly. With credit cards being doled out by companies to almost everybody with a reasonable salary, the spending habits for user consumption have shot up considerably. While on the on the one hand it is bodes good for the economy, on the other hand many people tend to over spend and default on their outstanding, thereby getting a bad credit score and also the non-performing assets of the lending institutions is on the rise.
This rise in consumption has also had a negative side effect to the masses. Many of us have unknowingly or unwittingly fallen into a debt trap. So what exactly is a debt trap? While there is no single definition that fits all, the general definition is that, if you have fallen into the habit of taking loans on a continuous basis to pay off your outstanding, or if you borrow money on a regular basis only for consumption without any savings, then in all probability you have fallen into a debt trap. Now that you know what a debt trap is, let us try and understand some classic signs to become aware that you are falling prey to a debt trap since a debt trap, can affect any generation.
Credit Card Outstanding: The first and foremost thing to look out for is your credit card management. If you have multiple credit cards and have gotten into the habit of clearing your dues only for the minimum amount, then it is a bad sign. The interest on credit card is quite high if you do not clear your dues completely month after month with discipline. If you pay the minimum amount required, then the outstanding starts to accumulate rapidly and before you know it the amount has become so huge, that you are now in a situation, where in you need to apply for a loan to pay of the huge amount. If you have huge outstanding on your credit card, then it is a classic sign that you are falling into a debt trap.
Consumerism: This happens when you purchase white goods as they are known, on a regular basis, when you cannot afford it. Some examples are buying expensive mobile phones; TV’s, eating out at fancy restaurants, or splurging on branded clothes and accessories. You should analyse your income and spend on only what you can afford. A loan taken for white goods is another sign that you may be falling into a debt trap. White goods are upgraded regularly and if you too get into the habit of borrowing money just to keep updated, then your debts will increase with over a period of time. Hence avoid over spending on consumables as this will eventually lead you into a debt trap.
Borrowing for fixed expenses: Every household has a standard out flow of cash, month after month. These could be in the form of utility bills, expenses for groceries, fees for children education, rend for accommodation etc. If you find that you have to borrow money or take loan to take care of fixed expenses, then it is again a classic sign that you are heading towards a debt trap. The fixed expenses will only increase with time and you will need to keep on borrowing monies to keep up and pay for the fixed expenses.
Existing loans and EMI’s: Most people avail of loans at some point of time or other for various requirements. As a general rule, loans should be taken only for purchasing of a house, or at times a car or for medical emergencies. However one should be aware that if the EMI amount is more than 50 percent of your salary in hand, then you are probably in trouble and are heading for a debt trap or are already into one. If you find yourself applying for multiple loans to pay off existing loans then it is a sure sign that you are already into a debt trap
Projection on forthcoming wages: Many of us borrow now in the hope that the income or wages will rise in the future and we will get an increment during the appraisal cycle, or we may be banking on that bonus or incentive. All of these components may or may not materialize. They are at the discretion of the management based on performance of the company and the employee, and hence are not guaranteed or may be partially guaranteed. Hence spending now in anticipation that you will get your complete monies that you had projected is a fallacy and again a sign of a debt trap.
The above are some of the classic signs of falling into a debt trap, if you ever find yourself falling into any one of the above then it is time you analyse and try to avoid falling into a debt trap. Borrowing and taking loans for necessary things like purchase of house or medical emergencies is fine as long as you repay the amounts on time via EMI’s. This takes discipline which we need to inculcate in our self to avoid falling prey to a debt trap.