Debt is a double edge sword. It can be good, but it can also mess up your life. Think of mortgage or car loans, which are considered good loans because of their security. But they’re also high-cost loans such as payday loans or credit card debts that can lead you into a debt trap if you’re not careful.
A debt trap refers to a situation where you have more loans than you can repay. People find themselves in such situations often. Once you’re there, you should not start thinking about how you got there but how to get out.
So, how do you get out of a debt trap? Here is a guide to help you out.
1. Consolidate Your Debts
People find themselves in a debt trap when they have several loans that it becomes too hard to keep track of. When this happens, the best method to find your way out is to consolidate them.
Find a way of merging your personal loan, auto loan, credit card debt, and payday loan into one. The method can help you close several loans and leave you with one to focus on.
This makes it easier to track your debts and focus on repayment. It can also help you swap high-interest loans into much lower ones.
2. Find Ways to Increase Your Income
Increasing your income can get you access to more money, which you can use to finance your loans. You can increase your income by taking up a second job, finding freelancing gigs to carry out part-time, or starting a small business. Find out those skills you’ve been sleeping on and start making good use of them.
3. Manage Your Expenses
If you’re spending more than you can afford them, it’s time to drop that habit. You should start working towards ensuring your expenses are less than your income.
Reducing your expenses can be hard, especially if you have to let go of some luxuries, but it’s worth it if you’re in debt up to your neck.
You can consider moving into a smaller house, letting go of one car, or starting cooking at home instead of eating out.
4. Start by Paying the Expensive Loans
If you don’t consolidate and opt to pay separately, you should start paying the expensive loans. Recognize those expensive loans with high-interest rates and start settling them one by one. Come up with a working strategy to pay them off.
Also, ensure you don’t take any fresh high-cost loans as you pay the pending ones; otherwise, you won’t get out of the problem.
5. Take Care of Your Credit Score
A debt trap has a high chance of ruining your good credit score. If you’re not careful, you might not be able to borrow for a long time even after paying off all your loans.
The amount you’re able to borrow makes a high percentage of your score, but it can only remain high if you can pay on time.
As you find your way out of the debt trap, find a copy of your credit report and know where you stand. Work on making improvements to the score so that you’re not locked out the next time you need to borrow.