According to The Money Charity, the average UK household has £2,476 of credit card debt and a total debt of £64,926. So, if you are trying to repay your debts, you are not alone.
However, though debt is widespread, it does not have to become a debt trap. In this article, we are looking at how to avoid debt traps and the five most common traps to help you fortify your finances against risk. Scroll down to continue learning.
A debt trap happens when a borrower cannot move away from debt and ends up in a cycle of borrowing money. This is often due to increasing interest and fees or poor financial planning.
Though it may seem like an impossible challenge, you can escape a debt trap. Common remedies include strict financial management, repaying high-interest debt or getting debt assistance.
You can also avoid debt traps by informing yourself of the main causes of debt traps. See the top five common routes to a debt cycle below.
These debt traps are not the only causes of debt in the UK, but they are some of the most common reasons individuals find themselves in a borrowing cycle. Be mindful of these when organising your finances.
An estimated 60 million credit cards are in use in the UK, so it is no surprise that credit card reliance makes the list.
This happens when you overuse your credit card and spend more than you can repay, often on non-essential purchases. Credit card reliance can lead to high-interest debt and a lower credit score.
Try using cash or debit instead of credit cards and pay off as much of the balance as possible to avoid extra charges. You should also limit credit card spending to planned expenses you can afford.
Living beyond your means is a critical error. If you spend more than you earn, debt will quickly accumulate and you may have to rely on debt consolidation loans to pay it off.
You must create a realistic budget and cut down on non-essential purchases if you want to know how to clear debt caused by living beyond your means. The best way to do this is setting a strict budget or doing a no-buy year.
High-interest debt that accumulates quickly can have a devastating impact on your finances.
Never leave this type of debt until the end. Start paying off high-interest credit cards or loans first and consider debt consolidation to lower the overall interest rate.
You must also avoid taking on more high-interest debt.
Loans can help you make big payments or cover expenses in a pinch.
However, you should never take out a loan without reading or understanding the terms. This can lead to a debt trap, as unexpected costs might be incurred that you have not prepared for.
Always thoroughly read the terms before signing and, if in doubt, ask the lender specific questions to get the clarity you need.
Finally, online get-rich-quick schemes are becoming an increasingly common cause of debt.
These dodgy schemes demand a big investment and promise instant high returns. However, they are very risky and can lead to financial harm.
Rather than signing up immediately, do your research and step back if the scheme looks too good.
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