How to avoid falling into a Credit Card Debt Trap

How to avoid falling into a Credit Card debt trap?

Credit Card spending in India is now back to pre-pandemic levels. The rapid rise in online shopping and OTT consumption is certainly a factor. However, apprehensions over running up debt are also quite common. The truth is that, like any other financial instrument, having a Credit Card balance has its advantages - like improving your credit score, for instance.

However, Credit Card usage must be accompanied by timely repayments each month. This allows you to get the most out of your Credit Card and prevents you from falling into a debt trap. While financial freedom is an aspiration in everybody’s life, the ways to accomplish it may call for some clever moves.

Telling good debt from bad

At the outset, it is important to tell a good debt from a bad one. To understand this better, you may want to classify your debts under two kinds: revenue generating and non-revenue generating. A debt taken to purchase an asset can help generate revenue for you for a long time. This is known as good debt. On the other hand, a loan taken against an asset that does not generate any revenue is known as a bad debt.

Here are five ways to help you get out of the debt trap.

• Identify the issue
  
  Make a list of all your monthly minimum payments and their respective due dates. This will give you a complete picture of all your obligations and think about how to allocate the funds you have available for repayment. A detailed and meticulous review is the first step to solving your current debt problems, bringing you closer to a viable solution.

• Prioritise your needs
  
  Next, review your itemized expenses and categorize them to identify essential, semi-essential and non-essential items. For instance, if you are in a debt trap, you may want to refrain from purchasing non-essential or luxury items. Semi-essential items, on the other hand, are not critical for survival but add to your comfort. Avoid spending on these if possible, or look for cheaper alternatives. Avoiding non-essential and semi-essential items to facilitate debt repayment can have a long-term positive effect on your financial condition. condition.
  
  
  
• Extend the due date, if possible
  
  It is common for certain unexpected expenses to occur during a given month, making it difficult to continue making Credit Card payments on time. If so, contact your Credit Card issuer to check whether the due date can be extended by a few days. This will give you some much-needed flexibility and help you get back on track faster- without damaging your credit score.

• Make behavioural changes
  
  To achieve small cost reductions, you may want to make some behavioural changes. For instance, to get out of bad debt, you may want to reduce the frequency of eating out. This ensures cost savings on food, and it can also benefit your health. Preparing a monthly expenditure plan and calculating the extra amount you save by making behavioural changes will help you realise how much you can save over time.

• Consider debt consolidation
  
  Instead of servicing different loans with different interest rates, you may want to consider consolidating your debt under one Personal Loan offered by HDFC Bank. This is an option where you consolidate different loans under a single loan. This can simplify your life and get you out of a debt trap.
  
  Click here to know how to manage your existing loans better
• Build an emergency fund
  
  Saving is a healthy habit. And while it is important to save money, you should also create a special fund to handle emergency expenses. For example, if you meet with an accident and are out of work for a few months, you’ll need money to sustain yourself. With an emergency fund, you can comfortably manage your expenses. An emergency fund can help you navigate tough times without having to fall back on a loan.
  
  Conclusion 
  
  Having a healthy control of your finances can go a long way in achieving financial freedom. Track your income and expenses to determine how your money is being spent. Remember, taking a loan can actually be good for you – it can solve a pressing financial issue. Repaying it on time safeguards you from high-interest rates and helps you meet your financial goals.
  
  Are you looking to apply for an HDFC Bank Credit Card? Click here to get started!
  
  ​​​​​​​*Terms and conditions apply. Credit Card approvals at the sole discretion of HDFC Bank limited. Credit Card approvals is subject to documentation and verification as per Banks requirement.