Debt is something that is consistently positioned as a negative – and it certainly can be if you don’t know how to manage it effectively. But debt can also be a powerful tool when it’s managed wisely. Many lenders will want to see that you have effective debt management skills before considering you for a loan, whether that’s to get a new car, purchase your first home, or to take out a personal loan to fund a vacation.

Debt can be useful, but it’s also incredibly easy to fall into a debt spiral that can put serious long-term strain on your finances. Understanding the most common debt traps so you can avoid them is a key component to financial literacy and success. Exchange Bank of Northeast Missouri has put together this guide of some of the most common debt traps to help you steer clear of them on your financial journey.

Debt Trap #1: Minimum Payment Mentality

One of the biggest debt traps that people fall into is having a minimum payment mentality. That is thinking that the minimum payments on their credit cards or loans is sufficient. While it’s enough to keep the debt collectors at bay, making minimum payments is not only not helping you make any progress, but also setting you further and further behind.

Frequently, the minimum payments aren’t even enough to cover all of the interest that has accrued over the month. This interest compounds over time, putting you even more in the hole despite your payments. Whenever possible, pay more than the minimum amount and, if possible, take care of the balance entirely to keep your debt under wraps.

Debt Trap #2: Payday or High-Interest Loans

When you need money fast, it can seem like a payday loan is your only option, but it’s important to know that these types of loans, and other high-interest loans, are a double-edged sword. On one hand, they can help you out of a tight financial situation, but on the other hand they can just as easily put you into on further down the road.

These loans typically feature outlandish interest rates that compound over time to send you spiraling into debt – quickly. Rather than relying on these predatory loans, consider a savings account from Exchange Bank of Northeast Missouri to serve as your emergency fund. Saving money now while you have the ability to can be a great way to have a nest egg to fall back on when times get tough and can help you avoid falling for a payday loan scheme.

Debt Trap #3: Ignoring the Total Cost of Financing

In a similar fashion to the second trap, the third trap of only focusing on a low monthly payment for your financing, rather than the overall cost, can send you spiraling into debt quick. By advertising “affordable” monthly payments, many loans are hiding things like high interest rates and extended loan terms. These factors will end up in you paying far more over time than what you originally took out in principle.

Instead of focusing on getting the lowest payment amount possible for your loan, try to get shorter terms on your loan that, though they will have a slightly higher monthly payment, will wind up saving you money down the road. EBNEMO has a number of great loan options available to help you get the money you need at terms that work for your situation.

Debt Trap #4: Lifestyle Inflation

Have you recently seen an increase in your wage? It can be tempting to use your new-found financial situation to fund a lifestyle increase, but that can be a quick and dangerous way to get in over your head. With a pay rate increase, many people find they are now able to qualify for higher loans than they were previously, but with that comes the challenges of managing higher debts.

The better way to fund a lifestyle increase is to maintain the lifestyle you currently have, while opening a savings account – like one you can find with Exchange Bank of Northeast Missouri – and saving money for family vacations, large purchases, and other expenditures that come with making more money. Responsibility is key to financial independence and security.

Debt Trap #5: Co-Signing a Loan Without a Solid Plan

Co-signing on a loan can be a great tool for helping out someone who has poor credit or hasn’t had the time to build up their credit yet, like helping your child get their first car or their first apartment as an adult. But co-signing on a loan can come with some serious drawbacks and financial responsibilities.

If you are going to co-sign on a loan, make sure the person you’re signing with understands the responsibilities of a loan and has the financial means to make the payments on time and in full. You should also be aware of your own personal finances in the event that you become responsible for paying back the loan on your own.

By following these few tips and avoiding the most common debt traps, you can set yourself up for financial success both now and later in life. For more tips and tricks on the road to financial literacy and freedom, reach out to a member of our team today!

Speak to the EBNEMO Team

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