Warning signs of an approaching credit card debt trap

Prevention is better than cure. I’m sure most of us must have heard that phrase. But how often do we practice it? We are rarely able to apply it in our financial life, especially when we use a double-edged sword like credit card, whose role in our financial life depends entirely on our usage and repayment behavior.

Between the hustle and bustle to make it a boon or a curse to our finances, a term that pops up every time the latter wins, is the debt trap. And more often than not, it’s simple credit card negligence that pushes them into the debt trap, and all they’re left with is the stress of getting out of it.

So, isn’t it better to dive deep into our daily credit card habits and mindset to identify the warning signs, otherwise we will eventually fall into debt traps!

Curious to know?

Read on as we uncover some of your credit card habits that are nothing less than red flags you need to watch out for to avoid falling into the debt trap.

1. When “minimum contributions” become your best friend

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Whenever you look at your monthly credit card bill, the sight of only paying the “minimum amount” owed often looks nice, doesn’t it? After all, it’s only about 5% of your total outstanding dues, payment of which on time would save you from late payment charges.

This is exactly what many credit card users, mainly the unruly, tend to be drawn to. In fact, they are too comfortable paying back only that minimum fee each month that it becomes their habit. And ultimately, it’s a sure sign of falling into the debt trap.

You simply continue to renew the credit each month by paying minimum dues, in addition to incurring heavy finance charges of around 40% per year on unpaid dues.

So, instead of getting into that disastrous financial habit of repeatedly paying minimum credit card dues, it is always better to pay the dues in full by the due date.

Even if you are unable to pay the full dues one day due to financial hardship or overspending, try not only to pay the minimum amount, but also the maximum amount you can repay, even if is not the total amount. This would at least reduce the amount of unpaid dues on which heavy financial charges will be levied. And be sure to pay off any remaining unpaid dues as soon as possible.

Read also; How to choose the right credit card for yourself

2. When you frequently withdraw money from a credit card

Cash withdrawal by credit card
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Another red flag for credit card users is when they need to withdraw money from their credit cards. Having to take this step is in itself a sign that your financial habits are not going in the right direction.

Credit card cash withdrawals hurt your financial health in not one but two ways.

First, the cash advance fee is levied on the amount withdrawn, and second, the high finance charge is levied on the amount withdrawn, with the latter being levied from the day of withdrawal until it is fully reimbursed.

So, while finance charges themselves are enough to burn a hole in your pocket, having to pay them with cash withdrawal fees feels like an invitation to financial trouble and even a sign of not being able manage your finances, right? Especially since cash withdrawals by credit card are always considered the last resort when you need cash, and opting for this option, and that too often, is in itself a red flag in your life. financial and a signal that you may already be in default. on your credit card refunds or may soon.

Read also : How Secured Credit Cards Can Help You Enter The World Of Credit Scoring

3. When your expenses regularly take up a large portion of the credit limit

Credit utilization rate
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The proportion of your total credit card limit that you use is called CUR (credit utilization rate). For example, if your total credit limit is ₹2 lakh and your outstanding credit card charges are ₹75,000, your CUR turns out to be 37.5%.

Not only is CUR a key parameter taken into account for the calculation of your credit score, but it is also an indicator of your financial health. As a general rule, credit bureaus generally consider consumers with this ratio above 30% to be credit-hungry, and therefore more likely to default. That’s why credit reporting agencies even reduce your credit score by a few points when you exceed that 30% mark.

In addition to this, having a high CUR also implies that you are consuming a large portion of your credit card limit to make purchases or transactions.

This habit of consuming a large portion of your credit limit in itself depicts your heavy reliance on credit, which again translates into higher chances of approaching a debt due trap. the inability to repay on time, in the eyes of financial institutions and credit reporting agencies.

Read also : Why Your Credit Score May Drop Despite Timely Payments!

4. When you keep racking up credit card EMIs

EMI credit card
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Are you one of those credit card shoppers who grab everything they want to buy, on NDE? Do you keep ticking off everything on your to-do list, whether it’s a smartphone, furniture or any other product, by taking it on EMIthat you might not otherwise have bought in priority or could not have bought if you had paid in a lump sum?

If so, then understand that this “good habit” of “conveniently” buying everything on EMI by credit card, whether it’s “no charge” EMIs or regular EMIs, can be a sign of approaching d a debt trap. You wonder how?

First, the concept of easy EMIs and seeing the “relatively smaller amount” to be paid for a few months instead of lump sum payments, is what makes many people even buy something that might not have not been a priority or even necessary. And that not once but frequently! It all ends up adding up to your credit card bill, right?

And that’s not all. Credit card EMIs also increase your minimum amount due.

While it’s best to focus on timely and full monthly credit card bill payments, life’s uncertainties can sometimes lead to difficulty repaying dues in full. And in such scenarios, if you have credit card IMEs, you will not only pay 5% of the total dues as minimum due (if required).

In fact, your EMI amount, whether it is ₹5,000 or ₹20,000, will be included in your “minimum contribution amount”, in addition to the usual 5% due on the remaining total bill.

For example, your credit card bill for a month is ₹40,000, including ₹10,000 for an EMI credit card. So in this case, instead of your minimum amount due being around ₹2,000 (5% of 40,000), it will instead be around {₹10,000 (EMI amount) plus 5% of (40,000- 10,000 = 30,000)}, i.e. ₹10,000 plus ₹1,500, thus totaling a minimum due of approximately ₹11,500.

So when you keep taking things on credit card EMIs, be prepared to also see your “minimum dues” increase, a default that not only results in late payment penalties and high finance charges, but even lowers your credit score!

And that’s not all. You will also have to pay GST every month on your EMI purchases, in addition to the risks of having to refund a processing fee as well!

Therefore, it is best to exercise caution when purchasing anything available on credit card EMIs. In the end, it all adds up to your credit card bill itself, which you have to pay out of your own pocket. So why increase your chances of falling into a debt trap by accumulating credit card EMIs that keep increasing your bill and even minimum dues to a great extent.

It is therefore best to opt for EMIs only when absolutely necessary, and if you are financially prepared to repay the “added” EMI in your minimum contributions, in the event of adverse financial circumstances in which you cannot not repay the full amount due on the due date. .

Read also : 4 Reasons Millennials Say Yes to a Credit Limit Increase

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About Shirley L. Kreger

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