Avoiding The Debt Trap

Not all debt is bad and most people can’t avoid accumulating some debt, unless they’re heir to some massive fortune. Having said that, some debt is just plain toxic and should be avoided like the plague.

Payday Loans/Cash Advances

Payday loans let you borrow money from your next paycheck. They’re meant to act as a stop-gap when you have an emergency expense that is outside your budget. However, payday loans are a deadly trap because of the way they’re structured and the expensive costs associated with them. For one thing, they’re extremely short term and must be paid back, in full in one to two weeks.  If you’re already living paycheck to paycheck,  you’re almost certain to be short after paying back the payday lender and need another advance from your next check, plus an additional fee to last you until your next pay day. This is how payday lenders make their money and how the payday debt trap closes.

 

Before getting a payday loan, consider the alternatives. Can you get a small loan from your bank? How about friends and family? Is the reason you need the additional money really make or break, or can you go without until your next payday?

The best solution, of course, is to budget for unexpected expenses ahead of time. Always allocate a portion of your savings as your rainy day fund and do not touch it unless it actually rains.

Overdraft Fees

It may not seem like much at first. $30 here, $25 there, those little charges your bank charges you “as a courtesy” when you overdraw your account. However, if you continue to rack them up, they can take a sizeable chuck out of your money over a year’s time.

The law now requires banks to ask you before “covering” ATM and check purchases when you don’t have sufficient funds to cover them, and assessing you that overdraft fee. Regardless, call your bank to make sure you are not “opted in” for this “service.”

The best way to avoid overdraft fees and non-sufficient funds fees is to carefully account for every penny you spend.  This is especially important if you use your debit card a lot. The best way to handle debit card transactions is to save all your receipts and when you get home, immediately record them in your check register and subtract them from your balance.

Using Your Credit Card Unwisely

If you’re not in the habit of paying off your credit card balances monthly and/or spending more with your credit card than you can afford to pay at the end of the month, then you’re headed for debt trouble.

The bank charges you interest on the money you borrow if you don’t pay it back at the end of the month. This interest accumulates the longer you carry a balance and causes your indebtedness to them to grow. Making the minimum payment only covers a portion of the finance charge and does little to nothing to pay down your actual debt.

Only use your credit card as a tool of convenience, such as to purchase things online. Use it to make routine purchases, account for the money, and pay off your balance in full every month. If you do this, you should keep your credit score high and stay out of the debt trap.

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