The Lure of Debts: How to Stay Away from them

Have you heard of the story of the Greek tragic hero called Achilles? It was predicted that Achilles would die young. To prevent such a disaster Achilles’ mother dipped him in a river that made him invulnerable, except his mother held him by his heels which remained untouched by the water. He grew up to be a great man and won many battles. However, one day an arrow was lodged in his heels and he died young, as had been predicted.

I am sure you must be wondering what Greek mythology and finance could possibly have in common? In this case, the devil does not lie in the details but what the story is trying to convey. We do all that we can to make our lives secure and create a wall which does not allow adversity to strike. Yet, adversity strikes when it has to and all the planning we had done, all the wealth we had amassed maybe threatened. Like the arrow lodged in Achilles’ heels. One such aspect in today’s modern world that haunts even the richest is the possibility of debt traps. It is easy to slip into one and not realize and incredibly hard to become debt free. So like Achilles you have created for yourself a secured environment by investing in Mutual Funds, Real Estate and Insurance but your metaphorical heel that is your debts, makes all the meticulous planning and savings insufficient.

Why are You in Debt

People who are neck deep in debt always think back and wish to pinpoint at the exact moment when they knew the debt issue was way out of hand. As a debtor when you constantly paying back the installments or trying to keep up with the interest payments you must have been wondering why are you even in this situation? Why you, of all people, are in debt? A loan of any form is an agreement between two parties where the person taking the loan is contractually bound to repay the amount taken along with interest payments, the rates of which are decided by the regulating bodies and the institutions giving out the loans.

1. Overestimating Future Income

The loan is taken with the assumption that the person on the receiving end will have a steady cash flow in the future. Hence, loans are taken on your expected future income. The loan becomes a debt trap when individuals tend to be over optimistic or fail to ascertain the level of their increment. What if you did not get promoted this year? What if the 10% increment you expected landed on being just a 5% increment or no increment? Most employment opportunities do not come with fixed increments and vary depending on individual performances. Hence, if you are taking large amount of loans on the basis of organizational speculations then you are in a debt trap.

2. Overly Optimistic

Another reason why individuals find themselves in debt is because they tend to believe everything is going to be alright. If you are a salaried employee you keep believing that just because your colleague and friend has been fired, that is no reason to start preparing for your eventual lay off. Hence, in this fit of optimism you go and take a personal loan or buy a new house or a big car and have to pay considerable EMIs every month. Suddenly you get a notice that the organization has decided to “let go” of you. This is where you will find yourself in a sticky situation, one that you may find difficult to get out off.

3. Plastic Money

Plastic money is a boon to the digital natives where everything is just a swipe away. However, when you are neck deep debt in credit card, it seems like the biggest curse. Using credit cards is not a bad habit if you are:

• Making the credit payments on time which ensures that you do not have to pay any interest or making the most of the credit free period


• Paying the minimum amount or more every month to keep the debt from piling


• Keeping a track of interest payments and avoid paying late fees

However, if your usage has spiraled out of control and you are paying hefty sums of interest and yet to start repaying the principal then this is a sure sign of a debt trap.

Managing Debts

You are in considerable debt and the interest amounts keeps piling every month. It is time you took charge of the situation and started the process of debt management. Individuals often have the illusion that there is a quick fix method to do away with debts. Just the way your debt piled up slowly, getting out of the debt trap will also be a slow process and it is up to you to make it a steady process.

1. Stop Using the Credit Card

Credit card interest rates can be as high as 36% - 48%. While you are already paying the debts, on further purchase you do not enjoy any credit free days and from the day of the purchase the interest rates are applicable. Avoid using the credit cards and start using cash. This often helps in deciding what you need rather than what you want.

2. Focus on Maximum Payments

A lot of stress is given on the minimum payment to be paid. However, if you are capable of paying off more, then check for the maximum amount that can be paid in a month. Once you start paying the maximum amount you pay lesser as interest amount. Check the monthly interest cycle of the bank and the dates on which the interest are calculated. Pay specifically on those days and do not wait till the last due date. This way you even save interest payment on the amount to be paid that month as well. For example, the maximum amount that you can pay in a month is र 25,000, try and do that. If the interest is calculated on the 5th of every month then make your maximum payment before that day to save interest on र 25,000.

3. Use Balance Transfer Facility

Holding multiple credit cards is a common phenomenon. Hence, if you are a multiple credit card holder you could transfer the dues of one card to another or transfer all debts under one card which will allow you to get an idea of the total outstanding amount. The bank which allows the longest credit free period transfer funds to that and be relieved of debt for a while. You can use the credit free period and repay the principal amount without worrying about the piling interest payments.

4. Pay off Debts with the Highest Interest Rates

Individuals usually have the tendency to address the debts with the shortest due dates. A little change in your approach could reduce your debts. If you start tackling your debts starting with the highest interest rates then you reduce the burden of interest and principal payments considerably. The faster you pay back the principal amount, interest payments will also reduce. Hence, tackle the debts with the highest rates of return.

5. Check the Bills Periodically

It is always best to check what you are paying for. If you have been paying interest and your credit card bills pile up without being checked, then you are in for trouble. You cannot discount situations where you may have been charged erroneously or you have been part of some technical error and had to pay for it. In such cases, instead of being ignorant and keep on paying, you need to immediately contact your bank. So check your bills and know what you are paying for. It may also reveal areas where you have been splurging and the bill acts a costly reminder of the same.

6. Visit a Debt Counsellor

The concept of debt counselling is still at a fledgling stage in India. Debt counselling centers are usually ran parallel by banks and allied bodies. As an individual who is considerably in debt, honesty and complete revelation of your financial situation maybe in your best interest. If you want to make the most of debt counselling do not hide any financial fact from your counsellor. The debts counselling centers managed by banks, as a part of their Corporate Social Responsibility and provide their service free of cost. Some of them are:

• Abhay Credit Counselling Centre: An initiative by Bank of India, has centres in: Mumbai, Wardha, Chennai, Gumla (Jharkhand)


• Disha Trust: An initiative by ICICI Bank with centres in Ahmedabad, Chennai, Delhi, Hyderabad, Jaipur, Kanpur, Kolkata, Ludhiana and Mumbai. This counselling centre is not exclusive to ICICI bank customers.


• Grameen Paramarsh Kendras: An initiative by Bank of Baroda and this is exclusively for the rural and agrarian communities.

Debt counselling is also conducted by private companies which usually consist of retired, ex-employees or existing bank employees who are aware of the banking system and have an insider’s perspective of the system. They help debtors come up with feasible solutions. A stipulated amount has to be paid by those who render these services.

As a debtor you have to remember that if anyone is providing a quick fix to your problems and it is too good to be true, then the alarm bells should start ringing. If you are going to a debt counsellor check their credentials and then approach them. It is advisable to go for a credit counsellor who has a positive reputation in the market.

Conclusion

The good old advice, ‘spend lesser than what you earn’ is timeless and universal. This advice is laughably simple till you fall in a debt trap and realize that unheeding this simple advice has led to complex problems. It is difficult to keep a leash on your needs when one is always surrounded by temptation. Using plastic money, taking personal loans or EMIs to a certain degree is necessary. Once you start living from one loan to another and spend most of your energy focusing on finding ways to reduce your debt, it is time to reassess your situation in term of asset and liabilities. Remember, help is always available when you seek it and the same applies for debt traps. Seek the right help, spend lesser and you will again be debt free.