- Date : 20/02/2022
- Read: 4 mins
Ways To Get Out Of A Debt Trap
A debt trap is a critical situation for any individual. When you borrow at high-interest rates and then get burdened with the interest payments, a debt trap occurs. This article focuses on providing you with complete knowledge about the debt trap. We will also cover how you can come out of the debt trap.
Let's start by knowing what a debt trap is.
What Is Debt Trap?
A debt trap is a condition where a person is unable to pay the debt further because of high-interest payments that stop repayment of the base amount. Debt traps can happen to anyone, and worrying about it is the last thing you can resort to. Instead, you can devise a plan and follow the steps that we cover to get out of your debt trap faster.
Here are some ways to get out of the debt trap.
Ways To Get Out Of Debt Trap:
1. Pay High-Interest Borrowings First
The best thing you can do while trying to escape the debt trap is by paying the high-interest borrowings first. Credit cards and personal loans charge the highest interest rates, so if you have any such borrowings, try to repay them first and get the burden off your chest. Having multiple high-interest loans is wrong; you can try debt consolidation, where you take a lower interest rate loan to pay off your high-interest borrowings first.
If you complete paying high-interest borrowings first, you'll find it easier to complete the other debts, and you can even save some money on your way.
Also Read: How To Come Out Of Credit Card Debts
2. Don’t Take New Loans
If you keep taking new loans, you’ll never be out of the debt trap. Taking a loan to fill another one will always keep you in a miserable state. The best step in becoming debt-free is to stop making new loans. No matter how attractive the loan offer looks, resist the urge and stay away from taking any new loan.
Taking a new loan while trying to escape the debt trap will worsen the situation, and you will stay in a loop of borrowing and repaying loans.
3. Limit Your Credit Card Usage
Credit cards are as evil as they are good. Mindful usage of credit cards will help you a lot in becoming better at finances, but reckless use will create problems for you. Buying anything with a credit card looks easy, but suffering is your only option if you are short of funds to repay. To stop this from happening to you, keep track of your credit card usage, and minimise it as much as you can.
Moreover, if you want to increase your credit score to decrease interest rates on loans, you should never exhaust your credit card limit. Always use 30% of the limit and try to pay it back as soon as possible to avoid hefty interest rates of 42% per year.
4. Try to Step Up Income
Increasing your income is the best way to get out of the debt trap faster. If you work in a corporate job, skill up and try to get promotions, hikes, or switch to a company that pays more for your current role.
When you increase your income, all the increased amounts should go into repayment of your debt and stick to the previous budgets you had. Doing this will get you a good pace at completing your loans, and you can be debt-free sooner.
Also Read: Save Tax After A Salary Raise
Follow these ways to get out of the debt trap. Once you are debt-free, manage your finances closely and track every movement to stop this from happening again.