3 Common Debt Traps That Will Cause You Long Term Financial Problems

debt traps

Debt can accumulate extremely quickly if you are not careful. Options that provide temporary relief from your debt can often lead to debt traps that worsen your financial circumstances.

A debt trap refers to a situation in which a debt is difficult or impossible to repay, often because high-interest rates prevent repayment. At Asset Solutions, we have tapped into our extensive industry knowledge to compile a list of the 3 most common debt traps that you must avoid.

Credit Card Misuse

The easy availability of credit has made people more comfortable with the idea of being in debt, whilst simultaneously giving them the freedom to fulfil and fuel their spending habits. Of course, credit cards can be a positive thing when used correctly; namely, a well-managed credit card is great for your credit score. However, due to the false sense of security they provide, credit cards also can make your financial situation a lot worse.

There is an extensive range of fees that are attached to credit cards. Some include: 

  • Late Payment Fees: even if your payment is one day late, a late payment results in a late fee. Notably, when the payment is more than 30 days late, it can also damage your credit score, which thus affects your future borrowing potential. Late payment may even trigger your interest rate to instantly increase!
  • Over-the-Limit Fees: this is a penalty charged by credit card companies when you exceed your credit limit. Again, the margins are tiny, and this penalty can occur even if you are only £1 over.
  • Monthly or Annual Fees: some credit card companies charge their customers a monthly or yearly fixed fee for use of their card. This fee can be in the hundreds.

All the above can cause serious problems. If these fees start to pile up, it makes getting out of debt even more difficult. Make sure you read all credit card agreements thoroughly if you really need to use one, so at least you are not blindsided.

Payday Loans

These are advertised as short-term loans that are designed to last you until your next payday before you pay them back. In reality, payday loans are costly credit. Although their interest rates are very high, they are quite easy to get, and so people that are desperate for short-term money will often fall into this trap.

Payday loans will often roll over into more loans, creating a vicious cycle of debt that is very hard to get out of. Avoid taking out a payday loan at all costs!

Refinancing Your Mortgage

Homeowners who are facing debt may opt to remortgage their homes to release equity to pay off debt. Especially when the rates are low, this can be a tempting option.

Whilst you will get a much lower interest rate on a mortgage loan than you can with credit cards, if you cannot make your payments down the line, you could risk default or foreclosure. Defaulting on a credit card will most likely affect your credit rating, but at least it will not cause you to lose your home. When you refinance your mortgage, you are effectively moving debt from one place to another that has a much higher risk involved.

If you are worried about debt, bankruptcy or possible individual insolvency, contact Asset Solutions today on 0800 689 3861. Our experienced team members provide unrivalled assistance to individuals throughout the entire insolvency process and help to stop bankruptcy. We understand that anyone facing problem debt is likely to feel overwhelmed and intimidated. That’s why we’re here to support you throughout the process and help you achieve the best results possible for your situation. Contact us today for more information.