How to Avoid the Debt Trap

Post recession, many Americans found themselves barely keeping their heads above overwhelming debt they had incurred through various ways.

The most common way of incurring unmanageable debt was through excessive use of credit cards. But this is, by no means, the only danger area. There are many ways in which you can let yourself become exposed to a debt trap. Here are a few tips on staying clear of debt:

Build an emergency fund

Many people, who are otherwise conservative spenders, end up with enormous debt when emergencies catch them completely unprepared. It might be a home repair or a medical emergency that forces you to take a loan.

No matter what the underlying cause, when the emergency is upon you, you do not have the time or the clarity of thought to search for competitively priced loans. You simply opt for the easiest to get, fastest to process or simplest to understand loan. Unfortunately, it is these loans that are often also the worst.

Building an emergency fund makes sure that you always have a financial cushion to fall back on when such emergencies crop up. Set aside a specific percentage of your paycheck every month to make up your emergency fund.

Lock up extra credit cards

You may have opted for a number of credit cards for a variety of reasons. Some people even believe that having many credit cards improves the debt to available credit ratio, which in turn boosts their credit score. A good debt to credit ratio does improve credit score but remember that if you default on any of the payments on these credit cards, the adverse impact is much greater.

Pay off dues on your unused cards and simply avoid renewing them when they expire. Lock up all but one of your cards. Use this single card during emergencies, for instance, when you are out of cash and need to buy something urgently.

Keep track of what you owe

Keeping track of your monthly expenses and your dues helps bring debt management to priority status in your life. Even if you are not currently deep in debt, you may well be close to it and not even be aware of the potential danger.

Making sure that you know exactly what you owe to whom keeps you aware of growing debt so that you can take the right cost cutting measures well in time, often before enormous interest rates begin to kick in on your dues. It also pays to keep track of your monthly expenses. By doing so, you can budget spending and save hundreds of dollars a month that you would have otherwise frittered away on unnecessary expenditure.

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