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Prateek, 25, moved to Mumbai two years ago. Before the lockdown, he would frequent the city’s bars, restaurants, and shopping malls. He also made new friends and often attended movies and concerts. And since these costs are frequently higher than he can afford, he uses credit cards to pay for them. These debts accrued over time as he often missed debt repayment deadlines. So much so that he has to pay Rs 15,000 in monthly EMIs for his credit card loans out of his Rs 30,000 monthly salary.
This problem, however, is not special! As children, our resources are limited, and our desires are numerous. And, to fulfil such desires, they often make transactions on credit without considering the consequences. Credit builds up over time, and the interest it accrues adds up to a debt burden. And there is no way out, no matter how hard you try.
1. Make a list of your debts
This is the first thing you can do if you’re struggling to get out of debt. Make a precise calculation of how much money you owe. To do so, write down all of your debts, including car loans, student loans, credit card debts, and so on, as well as their balances, interest rates, and minimum payment periods. This will assist you in determining the exact amount you owe.
2. Create a budget that provides for debt repayment
To get out of debt, you’ll need to build a monthly budget. We’ll explain why in depth.
Assume you receive Rs 50,000 a month and have a credit card balance, a student loan, and an automotive loan, all of which require monthly payments of Rs 20,000. No matter how difficult it is, you must keep your monthly expenses under Rs 30,000. Suppose you don’t have a monthly budget. In that case, your expenses can balloon due to impulse purchases such as ordering takeout too frequently during the week, splurging on unnecessary items during an online sale, and so on. This means you’ll have to use the money set aside for debt reduction.
3. To stop debt accumulation, never miss a bill
If you haven’t already realised, missing EMI payments is a major mistake. If the interest keeps piling up, you’ll have to pay interest on the interest, which will raise your debt even further. To prevent this, set a monthly note on your calendar and pay the instalment on the agreed-upon date.
What could be more straightforward? Automate your EMIs and credit card payments and plan them for the next day or shortly after your payment date. Set the date to the 6th of the month if you collect your monthly paycheck on the 5th of the month. This will save you time and effort in two ways. First and foremost, your instalment will be billed on time even though you forget the due date. Plus, because your pay date is approaching, the money is still plentiful, so you don’t feel the pinch in your pocket.
4. To begin, focus on the debt with a high interest rate
Debt or high-interest loans are the worst types of debt, so focus on them first. Personal loans, for example, have interest rates ranging from 12% to 20%, whereas credit card interest rates can hit 40%. As a result, begin paying them first.
Meanwhile, you will keep paying your loans on time, such as mortgages and student loans. These loans are often marketed as successful loans for two reasons. For instance, the interest rates are low, and you get tax cuts on them.
5. Step up the EMI amount/prepay debt whenever possible
As and when your income increases, like yearly increment, step up your instalments for credit card or personal loans debts. It should be done in the same ratio as your hike or personal loans or more if you can afford it. Also, if you get some extra money in hand like bonuses, investment income, etc., repay the debt.
Prepayment of personal and credit card loans, sometimes carry charges. The objective here is to come out of the debt, and these charges are nominal compared to the interest amount you would be paying.