Warning Signs Of Approaching A Credit Card Debt Trap

Prevention is better than cure. I am sure most of us must have heard this phrase. But how often do we practice it? Seldom are we able to apply it in our financial life, especially when using a double-edged sword like credit cards whose role in our financial life entirely depends on our usage and repayment behaviour.

Between the hustle to make it a boon or bane for our finances, one term that pops up every time the latter wins, is the debt trap. And more often than not, it’s the sheer negligence on part of the credit card which pushes them into debt traps, and all they are left with is the stress of bailing themselves out of it.

So, isn’t it better to deep dive into our day or day credit card habits and mindset to identify the warning signs, failing which is what ultimately lands us into debt traps!

Curious to know?

Read on as we unfold some of your credit card habits that are no less than red flags you need to watch out for to avoid falling into a debt trap.

1. When ‘minimum dues’ become your best friend


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Whenever you look at your monthly credit card bill, the sight of paying just the ‘minimum amount’ due often looks pleasing to the eyes, isn’t it? After all, it’s just around 5% of your total outstanding dues, timely payment of which would save you from the late payment fees.

That’s exactly what many credit card users, mostly the indisciplined ones, tend to get drawn towards. In fact, they get too comfortable in repaying just this minimum dues every month that it becomes their habit. And ultimately, this is a sure shot sign of falling into a debt trap.

You just keep on revolving the credit every month by paying minimum dues, besides incurring hefty finance charges of around 40% pa on the unpaid dues.

So, instead of getting into this disastrous financial habit of repeatedly paying minimum dues of credit cards, it’s always best to pay the entire dues by the due date.

Even if you are unable to pay the entire dues someday due to financial difficulties or overspending, try not to just the minimum due but the maximum amount that you can repay even if it’s not the full amount. This would at least minimize the amount of unpaid dues on which hefty finance charges will be levied. And ensure to repay the remaining outstanding dues at the soonest.

Also Read; How To Choose The Right Credit Card For Yourself

2. When you frequently withdraw cash from a credit card

Credit card cash withdrawal
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Another red flag for credit card users is when they have to withdraw cash from their credit cards. Having to take this step is in itself a sign that your financial habits are not going the right way.

Cash withdrawals through credit cards harm your financial health in not one but two ways

Firstly, the cash advance fee is levied on the withdrawn amount, and secondly, the hefty finance charges are levied on the withdrawn amount with the latter being levied right from the day of making withdrawal till complete repayment.

So, although the finance charges are themselves enough to burn a hole in your pocket, having to pay them along with a cash withdrawal fee, sounds like an invitation for financial trouble and even a sign of not being able to manage your finances, right? More so because credit card cash withdrawals are always viewed as the last resort when in need of cash, and opting for that option, and that too frequently, is in itself a red flag in your financial life and a signal that you may already be defaulting on your credit card repayments or may soon do so.

Also Read: How Secured Credit Cards Can Help You Step Into The World Of Credit Score

3. When your spends regularly occupy a big chunk of the credit limit

Credit utilization ratio
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The proportion of your total credit card limit utilized by you is termed as CUR (credit utilization ratio). For instance, if your total credit limit is ₹2 lakh and your outstanding credit card dues are ₹75,000, your CUR turns out to be 37.5%.

Not only is CUR a key parameter factored in for the calculation of your credit score, but it’s an indicator of your financial health as well. Generally, credit bureaus are widely believed to view consumers having this ratio over 30% as credit hungry, hence more prone to defaulting in repayments. That’s why credit bureaus even pull down your credit score by some points when you breach this 30% mark.

Besides that, having a high CUR also implies that you consume a lot of your credit card limit for making purchases or transactions.

This habit of consuming a big part of your credit limit in itself depicts your high dependency on credit, which again translates into higher chances of approaching a debt trap due to failure of making timely repayments, in the eyes of financial institutions and credit bureaus.

Also Read: Why Your Credit Score Can Fall Despite Timely Payments!

4. When you keep piling up credit card EMIs

Credit card EMI
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Are you amongst those credit card consumers who grab everything they wish to purchase, on EMIDo you keep ticking off everything from your bucket list, whether it’s a smartphone, furniture, or any other product, by taking it on EMIwhich you otherwise might not have prioritized to buy or in fact could not buy if made to pay in a lump sum?

If yes, then understand that this ‘cool habit’ of ‘conveniently’ purchasing everything on credit card EMI, whether it’s the ‘no-cost’ ones or the regular EMIs, can be a sign of approaching a debt trap. Wonder how?

Firstly, the concept of easy ‘EMI’s and seeing the relatively ‘smaller amount’ to be paid for some months instead of lumpsum payments, is what results in many people even buying something which might have not been a priority or even necessary. And that too not once but frequently! All this ultimately adds up in your credit card bill, right?

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

Although it’s best to focus on timely and full credit card bill payments every month, life’s uncertainties can at times result in difficulty to repay the total dues. And in such scenarios, if you have credit card EMIs going on, you won’t be paying just 5% of total dues as minimum due (if need be).

In fact, your EMI amount, whether it’s ₹5,000 or ₹20,000, will be included in your ‘minimum amount dues’, besides the usual 5% amount due on the remaining total bill.

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

So, when you keep taking things on credit card EMIs, be ready to witness a spike in your ‘minimum dues’ too, failure to pay which not only attracts late payment penalties and high finance charges but even pulls down your credit score!

And that’s not all. You would also have to pay GST every month on your EMI purchases, besides the chances of having to repay processing fees too!

Hence, it’s best to tread cautiously when hopping onto purchasing anything that’s available on credit card EMIs. In the end, everything gets added in your credit card bill itself, which you have to pay from your own pocket itself. So why increase your chances of getting into a debt trap by piling up credit card EMIs which keep spiking up your bill and even minimum dues to a great extent.

So it’s better to only go for EMIs when absolutely necessary, and if you are financially prepared to repay the ‘added’ EMI in your minimum dues, if an adverse financial circumstance arises wherein you can’t repay the full amount due by the due date .

Also Read: 4 Reasons For Millennials To Say Yes To A Credit Limit Increase

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