Today’s Financial Message Just for you, {{ first name | friend}}
Have you ever maxed out one credit card like it was free money, only to open a second one to make payments on the first?
That's the debt trap—one of the sneakiest tricks that have caught a lot of us off guard - especially if nobody taught us to beware of it.
Interest compounds faster than you can pay it down, turning a $2,000 shopping spree into a years-long nightmare like a bad '80s haircut you can't grow out. Getting out starts with facing the music… Continue Reading
“How am I supposed to get ahead when I never have enough to cover everything?”
"Debt trap" describes a scenario when a person, family, or even a company is caught in an endless cycle of debt.
Are You Falling Into a Debt Trap?
Sometimes, you find yourself in a position where you have to go into debt. It could be getting a home loan, an education loan, or a personal loan to help you deal with health issues or things you didn't plan for.
But, have you faced a situation where you have to borrow more money to pay off an existing debt? Opening multiple lines of credit can put you in a debt trap.
It creates a dangerous, difficult cycle of accumulating even more debt, where you need to keep borrowing to meet your living expenses, while the interest you need to pay back stacks up even higher.
What Does a Debt Trap Look Like?
Sarah,46, lives alone and works long hours to make a living.
She has two credit cards: a rewards card (24% interest) for dining out, gas, and groceries, the other 22%.
She uses personal loans for unforeseen medical expenses and auto repairs. (Average 18% APR on her Fair credit score.)
She’s used payday loans to cover utility bills, rent and to offset existing debt. (Typical APR: A standard $15 fee per $100 borrowed for a two-week loan equates to an APR of roughly 391%.)
She has a student loan: (7% interest) she doesn’t make regular payments, due to other financial obligations.
Sarah has multiple lines of credit: some are high-interest loans, including credit card debt and payday loans. The interest she accrues on these loans adds up quickly, increasing her debt.
Since she needs to use these loans to pay off bills and some of her existing debt, it's likely that she’ll carry over her balance to the next month, which will raise the interest rate on the loan even more.
Additionally, her postponed payments on student loans mean that the loan is still accruing interest.
Sarah's stuck in a debt trap - she has to borrow to not only meet her living expenses, but also to offset her current debt.
This is why it's called a trap - you're drawn into a cycle of borrowing, paying interest, and reborrowing.
Falling into a debt trap happens slowly, so it's important to know the signs and do something to stop it.
1. Create a budget.
Create a simple budget that lists all your spending and income. Staying within your means will be easier if you keep track of your spending.
2. Limit credit card use.
Limit using your credit card to only emergencies or planned purchases you can pay off in full each month. Avoid using credit cards for routine expenses.
3. Make extra payments.
If you can't pay the full amount, at least make the minimum payment. Prioritize high-interest loans when making extra payments.
4. Create an emergency fund.
Create an emergency fund to help you pay for unforeseen costs and avoid using credit in times of need.
5. Financial education.
Improve your financial literacy by learning about managing money, budgeting, and investing. Knowledge is a powerful tool for avoiding debt.
6. Debt repayment plan.
Instead of taking on more debt, look into ways to lower your interest rates, such as consolidating your debt with a personal loan or a balance transfer.
You can pay off your debts with the highest interest rates first, or you could combine your debts into one easier-to-handle payment.
7. Automate payments.
Set up automatic payments or reminders for when bills are due to make sure you pay them on time.
If you're having trouble making payments on time due to money problems, talk to your creditors and see what answers they might offer.
8. Lifestyle adjustments.
Be prepared to make changes if your way of life is making your financial issues worse.
This can entail reducing spending on things that are not absolutely necessary or looking for other sources of income.
Money Mindset Message
Indiana Jones and the Temple of Doom,1984
Did you know…
On this day in 1887 in Punxsutawney, Pennsylvania, residents first found a rodent that could predict the weather. (not actually) Hence the legend of Punxsutawny Phil and seeing his shadow was born.
It wasn’t until Feb 12, 1993 that the Bill Murray version was released, and I learned a valuable metaphor about being an adult.
Never drive angry, be safe out there!