Money as a goal is imprisoning; money as a tool is liberating. Living free of debt is a dream; finding yourself entrapped in a vicious cycle of continued debts can be frustrating. In this age and time when expenses exceed income due to inflation, living within limited means can be difficult. The burden of unwarranted debt becomes overbearing then. While a little bit of debt is good to build up your credit score in the long run, the lack of understanding between good and bad debt can have a daunting and irreparable effect.
Seeking loans is an essential element of financial planning, though you must be aware of how much debt you must incur to avoid taking another loan to repay the first one. Credit card debt is an albatross around the neck for many, especially, because of its high-interest rates.
The best personal finance advice is to take no debt at all. If required, take as little debt as possible. While it may seem a tad bit difficult, following some simple financial habits can help. Beware of the following habits that can not only push you into debt but can entangle you into an everlasting and unending cycle of debt repayment.
Penchant for new and upgraded gadgets
Having gadgets is cool, but should you always dump the old one in favour of the new? Or does it make sense to constantly upgrade your gadgets by adding new features to them? Be it peer pressure or your tendency to tinkle unnecessarily with your gadgets, upgrading the gadgets frequently costs money. Worse, if you pay for the same with your credit card as it would incur credit card debt that you would then have to repay.
Using a credit card to purchase beyond your means or opting for the “easy EMIs” option will add to your financial burden. It makes sense to steer clear of the attractive credit card offers and consumer durable loans and save your money from being spent otherwise.
Taking new loans to repay old debt
What happens when you fall into a pit? Do you dig deeper into the pit to come out of it? If not, then why incur new debt to get rid of the old. The tendency to pay off old debts taken from friends or banks through a credit card or a new personal loan does not relieve you of the liability. Rather, it adds to your list of financial liabilities as now you would have to work hard towards repaying off the new loan.
A fresh loan to get rid of an old one is equivalent to being trapped into a cesspool of debt that you find difficult to come out of. Moreover, it damages your credit score as your long list of outstanding liabilities prompts lenders to doubt your credibility.
Personal loans for avoidable expenses
You must be frequented with offers of personal loans. Bereft of the need for documentation, these loans can be availed at high-interest rates. Some expenses are avoidable. Seeking personal expenses to pay for them is futile as it not only causes you to spend beyond your means but also forces you to incur debt at high-interest rates.
Many banks and financial institutions masquerade “personal loans” as “travel loans” or “wedding loans” too. However, the idea behind giving you these loans would be the same – to force a debt on you for expenses that may not be important or can be tackled differently.
Using a credit card to withdraw cash
Do not mistake credit card withdrawals on the same footing as debit card withdrawals. You just incur a nominal charge when you use your debit card to take out cash. Credit card withdrawals are equivalent to taking short-term personal loans. No matter how inconvenient it may seem, avoid credit card withdrawals if you want to stay away from the burden of unwanted debt.
Many people tend to pay the minimum amount due on their credit card statement and pass over the remaining debt to be paid over the coming years, thus, incurring more debt due to the compounding effect of interest on the card.
Avoid taking undesirable debt if you are someone who is keenly working towards a financial goal. The effect of debt eats away into earnings and profits, thus, impeding your journey towards creating the much-desired corpus.