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What is a Debt Trap and how to Prevent it?

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You will fall into debt if you do not pay your bills on time and you are charged additional reminder fees and default interest. The longer you postpone billing payments, the deeper you fall into debt. The most common reasons for over-indebtedness include:

  • 26% unemployment
  • 9% illness
  • 9% divorce
  • 11% consumer purchases
  • 9% failed self-employment

Debt trap with loans, credit card, car leasing

Source:scmp.com

Often people get caught in a spiral of debt due to unfavorable loans or credit card conditions. Many borrowers do not read the terms or do not take the time to understand them. In the event of an unexpected financial breakdown, it ultimately turns out that the loan agreement is not as flexible as expected. For this reason, it is always important to agree on the best loan agreement terms possible. If you fail to consider these two points when choosing a loan, sooner or later you will regret it.

Consider cheaper options

If you pay too much for your loan, it is recommender to refinance. When choosing the right credit card, consider the type of credit card, interest rates, and fees. You can also fall into a debt trap with car financing. Above all, you should make sure that you do not choose long terms for the car loan. Terms of several years result in high interest payments even if you no longer use the car.

Debt trap – insurance

Source:mymoneymantra.com

We often take out an insurance policy once and then don’t touch it again. If an insured event occurs, we suddenly find out that our insurance does not cover the damage or that we have to pay a high deductible. This is not an uncommon scenario, so be well informed about the insurance conditions. Weigh up whether your insurance makes sense and under what conditions you can terminate it. If you want to optimize your expenses, insurance is definitely an area that you should look at separately. You may be able to negotiate better insurance conditions with another provider and thus lower the price.

Debt trap – house

Land tax, household expenses, and mortgages represent a significant amount of money. Gas, electricity, and water are expenses that are billed monthly or quarterly. It is important that you always have an overview of these costs. You should be aware about your consumption from energy suppliers and other costs in order to be able to plan any additional payments. This will protect you from unexpected expenses and give you time to save money for them.

Source:salliemae.com

Cell phone debt trap and entertainment

Young people in particular tend to spend too much money on cell phones and entertainment. You should definitely consider whether you actually need the latest mobile phone or the most powerful iPhone. Making calls can be just as expensive. The comparison of products and tariffs is crucial here. Check whether the expenses for entertaining the children can be reduced. Are subscriptions like Amazon Prime or Netflix really necessary?

How can the debt trap be avoided?

  • Make a budget. Even if this task involves a certain amount of effort, it will help you to keep a better overview of your income and expenses. It is important to update this budget regularly. Household book apps are particularly suitable for this. With the help of these applications, you can document your income and expenses on your mobile phone at any time. So you always have an overview of your finances.
  • Build up financial reserves. Nothing is more uncomfortable than when you have an unexpected expense and you have to overdraw your checking account. Overdraft facilities are one of the most expensive loans and should only be used at short notice in urgent cases. If you put some money aside each month and possibly even invest it, you can save the interest on your overdraft facility.
  • Increase your earnings. Take up a part-time job or increase the scope of your work with your current employer. If you do an excellent job, you can even request a raise, which will increase your earnings.
  • Pay your bills on time. You should always strive to pay all bills on time. If you do not do this, you may be charged additional reminder fees and default interest. This increases your overall costs. If you notice that you cannot pay the invoice on time, get in touch with the creditor, and extend the payment term or ask for a deferral. This is definitely a better strategy than constantly putting off the unpaid bill.
  • Never pay off your old loan by taking on new loan. Many people believe that when you replace an old liability with a new one, it improves their financial situation. Not correct. Debt rescheduling is only suitable if you can borrow the new capital on favorable terms. The total cost of rescheduling should be calculated separately.
  • Cancel subscriptions. Cancel subscriptions that you are not using. Often you get fitness or other memberships that you hardly use. Take a look at your bank statement and cancel subscriptions that do not bring you any added value.
  • Make a shopping list. Before you go to your preferred supermarket, you should always make a shopping list. The reason for this is that you are influenced by advertising in the supermarket and ultimately buy more than you intended. Spontaneous purchases can increase your bill by up to 20%. If you have a shopping list with you, you can orientate yourself on the products that you actually need.
  • Avoid expensive consumer goods. Of course, you should treat yourself to something from time to time. Regular shopping in luxury stores should be avoided if you want to optimize your budget. Buyers should endeavor not to borrow money to purchase consumer goods.

Admit debt and weigh options

Source:salliemae.com

Sooner or later you will have to deal with your debts. This is important in order to evaluate the situation and to be able to take improvement measures. First of all, try to weight in payments and expenses. Talk to your credit company and ask them to postpone your payments. This can give you some time to save money without going into debt. If you have lost track of your debts, it is advisable to get in touch with the creditors to find out about your outstanding debts. Anyone who has financial problems and is in debt should seek debt advice in their area. This helps the debtors to take measures to avoid falling further into the debt trap. If you receive mail from debt collection companies, you should definitely have it checked by the debt counselor and not sign any documents. Always keep track of your finances, save money, invest your capital and plan ahead. To find out more, follow this site.

How to Recognize When Your Debt Is Too High to Repay

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How much debt is too much? If you’re asking yourself that question, it’s a major warning sign that you’re probably already at that point. The best thing you can do for yourself is find a way to reverse course and start paying it all back. Taking the path to financial freedom is a great goal, but what if it’s just not possible?

It’s possible to get into more debt than you can reasonably pay back. But that doesn’t mean you have to spend the rest of your life in debt. Instead, you can explore options such as a consumer proposal or even bankruptcy. A Licensed Insolvency Trustee can help you evaluate your financial situation and identify the best way to move forward. You can visit Debthelpbc.ca to learn more about what Licensed Insolvency Trustees do, and how consumer proposals and bankruptcies work.

But how do you know it’s time to talk to one? You need to be able to recognize when your debts are out of control or too much to pay back without help.

Source:wsfcu.org

1. Your Balances Keep Getting Higher

It’s easy to “add to the pile” when you don’t keep track of how much you spend each month. Even if you’re trying to make progress by making more than minimum payments, unless you’re paying close attention to your expenditures, it’s easy to wind up covering for shortfalls by leaning on your credit cards.

One step you can take is to stop using credit cards altogether until they’re paid off. Otherwise, the temptation to use them to make ends meet can be too great.

2. You’ve Borrowed Money to Cover a Bill

Source:paydayloanshut1b.com

Borrowing to cover another bill is a sure sign that you’re in a tight spot and that something needs to change. It can put a strain on your relationships when you borrow from friends and family. You want to pay them back as soon as you can, but it’s only a matter of time before you’re hit with another big bill. Meanwhile, other sources of fast credit come with high interest rates that can leave you deeper in the hole.

A sign that you’re in deep trouble is taking out a cash advance on a credit card to make another payment. The interest charges on cash advances are higher than the APR for regular purchases, and while you may scrape by in the short-term, you’ve made the long-term problem worse.

3. You’re Thinking About Draining Your Savings

Source:fool.com

For some, high debt levels come after they’ve had years to save. When credit card bills start to get out of control, they start looking at their savings and wondering if they should drain it all just to stop paying interest rates.

Before you act, consider your options. In many jurisdictions, registered retirement savings are exempt from bankruptcy proceedings. You could keep your retirement savings and still clear your debts. Alternatively, if you have significant non-exempt assets, such as a secondary property or multiple vehicles, a consumer proposal allows you to settle with your creditors without liquidating any assets.

This is a difficult situation to be in, and the right answer will be different for everyone. Get a credit counselling consultation with a Licensed Insolvency Trustee to talk about the right way forward.

If there’s already nothing left in your savings account, you’re in a precarious situation. Any loss of income could upset the tightrope you’re walking. The sooner you take action, the better off you’ll be.

4. You Can’t Balance Your Budget

Source:themoneytemplate.com

One of the problems with the easy accessibility of credit is that lenders may offer you bigger loans and limits if you meet their criteria for it, but they don’t know what your budget is like. Just because your bank has approved you for a higher borrowing limit doesn’t mean you should take advantage of it.

Can your budget balance? The 50/30/20 budget rule is a useful rule of thumb for personal finances. It says that 50% of your after-tax income should go toward needs, 30% on wants, and the remaining 20% should go toward savings (or paying down debt). If more than 20% of your personal budget is going to credit card companies, it might be worth looking into alternative solutions – though changes to your budget may still be enough to conquer debt.

5. You’ve Applied for New Credit and Been Denied

Sometimes you can’t see the problem until someone else points it out to you. If you’ve applied for new credit, such as an auto loan, a mortgage, or a new card, you might be surprised to learn that you’ve been denied. Before you apply somewhere else, take a look at your credit history and score, which you can request from a bureau like Equifax or TransUnion.

There are many reasons you may have been denied. Besides your history with repaying debt, lenders also look at your credit utilization rate: the percentage of your available credit that you’re currently using.

6. You’re Getting Collection Calls

This is one of those big red flags. Once debt collectors start calling you, it’s because you’re considered delinquent on your debts. Though they may begin with annoying phone calls, that also means they can take legal actions such as suing you, which can lead to options like garnishing your wages or levying your bank account.

7. More than Half Your Income Goes to Payments

Source:cnbctv18.com

If, say, 25% of your after-tax income is being siphoned off by creditors, you could be doing better, but you’re not in deep trouble. Once you reach this point, you are very likely in over your head, and you would be a prime candidate for bankruptcy or a consumer proposal.

Bankruptcy can seem like a major life decision and a last resort, but there are times when it is the best course of action to move forward. There are also alternatives, like the consumer proposal. There are situations in which you have to recognize that you just can’t get out of debt on your own. If any of these situations apply to your finances, it may be time to try something different.

How to Manage Your Money When Going through a Crisis

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The coronavirus pandemic is far from over in the U.S., but already, it has left millions struggling as they lost their jobs due to repeated lockdowns. When times are rough, it is difficult to think straight and to add to our worries by trying to change our spending habits, on top of everything. But it’s important to adapt so you can survive through the crisis, so here are financial movements you should do or shouldn’t.

Entertainment in the COVID-19 Days

Source:scotsman.com

Who would have thought entertainment could be so important in our lives? Of course, we all like to go out, watch a movie, catch a play or head to a restaurant and go dancing afterwards. But if you were told that you weren’t going out on a given night, you wouldn’t have felt like you were missing out. However, the lockdown has created something new inside each of us, which has become as crucial to our survival as much as the money coming in: Being entertained.

When you can go outside your house, you rapidly lose track of what life is. Without working hours to be kept, the days rapidly mix one within the other. Entertainment becomes a way to either forget the confinement and refresh your head or for couples and family, a moment to share which brings normality to an uneasy situation. That is why Netflix was probably the most important company during the crisis, with millions of viewers around the world, evading to other worlds.

But you also need your time alone with entertainment and nothing is as helpful as music to soothe your soul. That is why Tidal, a music streaming app, was one of the most used during the lockdown as well. With over 60 million tracks and 250,000 videos, it provided a way out to be enjoyed alone or even with the other members of the family for an evening of dancing. Thanks to couponbox.com, you can obtain a reduction on the cost of the membership at Tidal but also on many different items like restaurants, a night at the hotel and clothes. That way, when you feel the urgent need to order out or do a little shopping, you can still save some money while doing so. Which brings us back to: How can you save money during these difficult times?

Defining what is necessary and what isn’t

Source:ft.com

This is probably the most difficult question you will face during this crisis. Why? Because needs can differ greatly from one person to another. That is, of course, until you need to reduce your spending to the bear minimum. Let’s hope this whole situation will resolve itself before any of us gets to that point.

However, there is no doubt that some habits will have to be changed for everyone facing difficult times on the horizon, after having been laid off temporarily or permanently for others. The problem is that we don’t know when companies will start hiring again, so it is better to save as much as we can in the meantime.

When defining what is necessary for you, make a list of all the extras you pay during a week (don’t write down monthly bills like electricity, loan or rent and other utility bill. Gas for the car, which would normally be one of the necessary spendings, may not be right now, if you don’t have to go to work. Once you have made the list, which should include things like cinema, restaurants, Netflix, golf, a day at the spa, etc., then you will have to start looking into what you are ok to live without.

Reduce Costs, Including Bills Whenever Possible

Source:workinmypajamas.com

There are things you should permit yourself to do in crisis which you should never do otherwise. One of them is lower your payment on your credit card. It is essential for a healthy lifestyle to be able to pay your credit card balance in full every month. If you don’t, that clearly means you are spending too much and there will come a time where you won’t be able to get out of this debt. But in a period of crisis, that is one of the bills you can cut by simply paying the minimum amount. However, be aware that you are doing so and that this situation is only temporary, or else you will find yourself in trouble. Then, go through your budget and try to find other bills on which you can temporarily pay less or simply stop for the duration of the crisis.

Reduce Your Savings Input

The best-balanced families usually have an amount of money they consider as savings for each pay check that comes in. That helps you build an emergency fund for times… just like the ones you are currently living. Don’t try to be mightier than you can be about savings. Of course you won’t be able to add to your savings (since you won’t be receiving pay checks anymore) but don’t stop yourself from using that money, because you believe it is not meant to be spent. It is exactly what it is meant to do: protect you in times of difficulties. Of course, manage it wisely so that you don’t find yourself spending it all. The fact that you have it doesn’t mean that you can continue your normal life as if you were employed.

Lower Your Pride and Get help from your Community When it Is Offered

Source:business2community.com

Community help is not always for other people then you. Hardship can happen to anyone, and you should not let your pride get in the way of accepting the help which is so graciously offered. Not all communities have this chance, so if you are part of one that provides it, accept it. To learn about the help which exists around you, call 2-1-1 or go to 211.org. The services they offer can be quite varied, from food banks, to meals for students and seniors and even psychological health for those who are suffering mentally from the pressure they are being put through.

There is also some relief that is being brought by the Federal government such as the postponement of federal student loan payments as well as coronavirus-specific unemployment programs. If you don’t take the time to learn about them, you may be spending money you shouldn’t have to or are not receiving some to which you are entitled.

Find a high savings rate

Now, is the perfect time for you to be proactive in looking for a better saving rate. It is easy to open a high-yield saving account today, in an online bank, which can get you more than the 0.06% average currently being given out (on average). Some even go above 1%. This is the simplest way you will find to earn more money from the one you already have and do so in a matter of minutes.

Conclusion

No matter what you do, keep a tab on how much money you are taking out of your saving accounts. The last thing you want is to find yourself having to rebuild it all once the crisis is gone. Yes, it is there to protect you and to enable you to survive such a crisis, but the more remains on your bank account and the easiest it will be to rebuild it when you go back to work.

Bad credit loans can do a lot of good for people with poor credit score

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A good credit score is a prerequisite for availing loans easily because lenders consider it as in index of the reliability of borrowers.  People with high scores have a good track record in managing them and hence more dependable to lenders while those with a poor score are risky borrowers about whom lenders have strong reservations.

Different lenders have different methods of considering what constitutes good score, but generally, a score above 700 is good, and anything below it up to 599 is the average score. Going down further can strictly debar people from availing it as lenders consider it high risk to lend them any sum of money no matter how small it might be. 

According to creditninja personal loans are mostly unsecured in nature, the score assumes the highest importance in gauging the reliability of borrowers. Low scores can not only limit borrowing options but can even result in denial. However, all is not lost for people with the poor score because many lending companies provide a lifeline to them by providing bad credit loans. It is the same personal payment but with some special consideration. 

Bad credits are alternative to traditional loans

source: goodfinanceservices.com

They are an alternative to traditional loans because banks and credit unions have strict requirements of good score to approve it of any kind. When someone with poor scores faces any financial emergencies like making payments for medical bills or need cash for meeting the high cost of car repair they would simply not qualify for it from the traditional lenders who use score a yardstick to determine its eligibility.  Instead, some other companies that specialize in the personal loan would be willing to give it to them despite bad credit and name it like bad credit loan. The approach is similar to repacking a product to make it look different, whereas all the characteristics of them are the same as any other. 

What is good or bad credit score?

Scores reflect the dependability of borrowers to lenders and the good or bad about it depends on the way lenders analyze the score to assess the risk of borrowers.  The score that some lending companies consider as a risk for their businesses might not be as much risk to some other companies. However, there are some guidelines to understand the broad distinction between good, fair, and poor score. The score scale ranges from 300 to 850 scores between 700 and 759 is good, and from 760-850 is excellent. The mid-range from 600-699 is fair, and anything below this range can be bad for borrowers as it diminishes the chances of availing it greatly.

Giving a lifeline to borrowers

source: iproperty.com

People with poor credit score must work hard to get it because the closer they are to the 600 marks, there is still some chance of getting it, but the interest rate will be much higher. They must pay the cost of higher interest in case they manage to get any of it approved. The high-interest rate helps to cover the risks perceived by lenders, and it can even be a lesson for borrowers who would be careful to ensure that they improve their score for better borrowing options next time. In fact, bad credit loans give borrowers an opportunity to correct their score and build a positive image that paves the way for better borrowing rates in the future.

Impact of bad credit score on borrowing

Shopping becomes extremely difficult for people with a bad score, but the silver lining is that still, they can hope to get it if they are willing to bear high interest. The options are, of course, much less because only a few companies would be willing to provide bad credit loans, but still, there is some hope that it would be available. Some lending companies offer both secured and unsecured loans to people with bad credit, but unsecured of it is more costly as it carries very high interest.  Yet, some types of it can come in handy when people are in dire need of money that should be available quickly.

Types of bad credit loans

source: fool.com.au

 Secured and unsecured are the two broad categories of it that have some sub-categories like Bad credit installment, PayDay, Cash advances, and title 

Bad credit installment loans – As the name implies, its payment comprises of fixed monthly installments, which is a great relief for borrowers as they do not have to pay it at one go nor immediately. It is a great opportunity to rebuild your score. Since the payment spreads over a long period, you can include it as a part of other monthly bills you pay. Making timely payments can qualify you for rewards too.  

Payday loans – When you are in urgent need of cash, it can save your day. The application process of it is simple and fast as the money reaches your bank within 24 hours. However, you must pay back it as soon as you receive the next paycheck. The APR on it is usually about 400%, and you need to plan well before taking it or else it can become difficult to manage.

Cash advances – This is a variant of a payday payment, and consists of issuing a check to the lender for its amount together with lenders fee and interest (annual APR is 400%) and the lender will take the full amount as soon as you receive the next paycheck.   

Title loans – You can avail it online or at storefronts, but it is a secured loan with an annual APR of 300%, and you must furnish collaterals. You must pay it back in a few weeks.  

While the opportunity of getting it’s despite poor credit is good news, be careful to evaluate the offers with a focus on the payment terms and interest rates so that you can manage it smartly.