One of the key factors of healthy financial habits is to keep track of your debts and to repay them in full and on time. Doing this impacts your credit score and determines whether lenders will perceive you as a reliable borrower, and find you eligible for greater loans for different purposes, and for issuing credit cards. However, even after being cautious with how we spend and save, there may be occasions, such as a medical emergency or other pressing financial circumstance, when we’re compelled to either max out our credit card, or we take on additional loans, and from multiple lenders. And in case we’re unable to repay our debts in full, our credit score is likely to get dented. Debt Consolidation is the Solution While owing debt to multiple lenders is not really a recommended nor easy situation, one solution for this is to consolidate all your debts. Essentially, this would mean that you take one loan to repay all of the debts that you owe, and then focus on repaying this one loan. 4 Smart Ways to Consolidate Debt Repay your consolidation loan on time: The idea behind taking a debt consolidation loan should not be to default on that too. Such a loan will help you be back on the track to financial stability. Cut down any unnecessary expenses, begin to save more, try to go up from paying the bare minimum due each month to the full amount due each month. This way, your interest won’t rise, and it will be easier for you to clear out your debts. Dip into your emergency savings: Your emergency fund can be put to prudent use when you’re stuck in a financial rut. Whether Public Provident Fund, National Savings Certificate, bonds and securities – either of these could help you in your debt consolidation plan without seriously impacting your credit score. Don’t close old accounts: Just because you took a debt consolidation loan does not mean that once you’ve cleared your debt, you need to close off your earlier accounts or your credit card account. This can adversely impact your credit score because you had worked towards building credit with your earlier account. Closing that would mean you’ll have to start over, and that’s not always an easy place to be in. Reframe your entire budget: A financial introspection may be effective in such cases, where you redraw your expenses and create a budget that’s practical and will help you see through your time of debt.
‘Don’t bite off more than you can chew’ is something we’ve often heard. It is also something that few seem to follow. That people would like to access funds, and additional funds to meet their growing needs is understandable. However, that the same people should be wary of falling into a debt trap is paramount. We often take a personal loan to help bridge a financial gap, but if that loan itself becomes a cause for concern, it calls for some serious introspection. What is a Debt Trap? Simply out, a debt trap is when you begin to spend more than what you earn, resulting in a situation where the debt you owe spirals beyond your control. For instance, you’ve taken out a loan, but aren’t in a position to repay that loan. So you take out another loan to pay off the earlier loan, and keep repeating this pattern. A debt trap becomes a financial quagmire that can get extremely challenging to get out of. There could be several reasons that lead a person into a debt trap. Some of these are, losing your source of income or having to take a huge cut in your income, an unexpected exigency, poor budgeting, no savings, ignorance about spending. However, with smart financial planning and budgeting, one can learn how to avoid debt traps, and easier to get out of one. How to Come Out of a Debt Trap? Understand and analyse your financial situation It helps to do a financial introspection, identify your pain points, and come to terms with the reality that you’re in debt. Once you’ve accepted that you’re in debt, identify the areas where you’re spending more, and consider whether you can curb some of those expenses. Draw out a financial budget and stick to it. Invest in an emergency fund Know that it’s financially prudent and pertinent to have an emergency fund, to help you deal with your immediate debts. Adding a small portion of your income to this emergency fund can help you get out of a debt trap in an easier manner. Work towards adding enough funds to help meet you with at least six months’ of living expenses. It is also financially prudent to invest in Public Provident Fund, National Savings Certificate, bonds and equities, which may eventually help you clear out some of your debts, if not all. Lead a financially frugal life As an individual’s income increases, it’s only natural that they may want to spend more. However, try not to get carried away with your expenses. Alter your initial budget slightly, and save more – in bonds, equities, add to your emergency fund. Check your credit score on a regular basis to keep track of where you stand. If you note a fall in your score, take immediate steps to improve your score. Make timely payments on your EMIs and Credit Card bills Not only is it important to pay off your bills and EMIs on a timely basis, it is equally important that these payments are made in full. Part payments will only keep increasing your debt and interest, eventually leading to a vicious debt cycle. Timely payments also positively impact your credit score, which will eventually help you on the road to financial inclusion and independence. Consolidate your debts You may find yourself in a situation where you took multiple loans to meet your different requirements. And now you’re in a debt trap. A viable solution for this could be to consolidate your debts – debt consolidation is an important step towards your financial independence. Consider taking out one single loan to clear out your existing dues, bringing down your multiple loans to one. This single loan will be easier to manage and you’ll have just one interest rate to think about. Consider alternate sources of income Try to have a passive source of income, such as from any rental property. Keep track of any insurance policies, and whether any of them are about to mature in the coming months, as the income earned on these policies could help repay some of your debts. You could also consider taking up independent projects to supplement your income.