Credit has proven to be a medical drug in times of dire need, however it can turn killer if taken beyond capabilities. Like how it works with drug overdose, too much debt can damage your financial health. At most instances, you’re stuck quite bad to realize how ugly this can get! And when you’re in it, you face issues like inadequate repayments and over the top interest amounts.
It’s being said that a favorable debt to salary ratio is 40:60, which basically means that once you’ve surpassed 40% of your salary into repayments, you’re crossing the line. The immediate action should be to do with paying off as early as possible, or atleast in the next appraisal cycle. Fixed commitments will keep coming in, the focus should be laid on reducing variables. Here, if you’ve taken a home loan, it is a relatively safer long term equation. You stay in a house, pay timely installments and admit the paid amount as income tax deductions. You’re not only saving on income tax but also rentals.
After taking into account all the probable signals, it is advised to assess your financial position. If you still think your position is showcasing negative balances, then it’s time to take a serious call!
The 7 signs that you’re heading into a bad credit trap:
1. Debt for personal needs
Besides possessions like a house, depreciation can be applied to all physical assets. Things like a car, mobile phone, home furniture, etc. depreciates with time. So, typically you will incur depreciation and interest cost on the valuable possessions. So, here It is extremely important to examine your needs beforehand. Categorize your needs basis your current priorities and future needs. Practically, you should repay back between 9-12 months, keeping your financial position in place.
A similar reasoning cannot be applied to a car or two wheeler loan. These assets are measured quite differently.
2. Unattainable lifestyle
Who doesn’t like an extravagant lifestyle! It starts with a few initial frills and gradually moves to habitual living. Living out of means becomes a part of life. Watch your expenses well on shopping, travelling, eating, partying, etc. If you’ve been living hand to mouth, then it will most definitely affect your financial position in future. It’s never too late to rethink your expenses and consciously act to reduce it. This is after carefully putting your savings aside.
Many lenders in the market are offering attractive terms and conditions, triggering individuals to buy anything under the roof. However, it is your common understanding to know the personal loan amount you can afford and the rate of interest for repayment purposes.
3. Credit Card limit
If you’ve almost exhausted your credit card limit, then it’s time to wake up! This actually indicates that in case you meet with an unavoidable situation like car repairs, medical treatment, house damages, etc. you will take up more credit. You will take on money on your credit card which will trap you for life. This will be additional to your existing credit loads. Atleast make an effort to keep your credit card spending below 20% of the existing value.
4. Uncontrolled spending
Do you keep a real-time trail of your spending? If you’re not, then you’re inviting trouble for later. It’s extremely important to know how much you’re spending and where are you spending. It’s always better to have greater visibility of your income and expenditure. Just focus on making your cash inflows and outflows matched up.
5. Loan Repayments
If your income goes majorly into repaying your loan amounts, then it’s difficult to manage your substantial overheads. Again to redirect your attention, your credit card spending should be below 40% of the full limit.
6. Not comparing loan terms and conditions
You may have relied your decision purely on interest rates, however all terms and conditions must be seriously considered. The rates keep fluctuating depending on the market conditions. So if the rates are already high, they may go higher with monthly costs.
7. Rejection for Future Loans
If your loan application is consistently getting rejected, then it’s important signal to catch! That proves how loaded you are already with weak debts and which in turn impacts your monetary position. This is a clear cut indication that you’re stuck for worse. So we would like to advise you to pay off your debts at the earliest and not be disappointed with rejections.