In this modern day when credit cards and loans have become a part and parcel of our lives, debt is often a four-letter word that you tend to take in your stride. That is until the day arrives when you find that a lion share of your salary is going towards debt repayment and you have little or no money left to meet your monthly expenses.
This is when debt starts weighing on your mind and you feel the pangs of guilt, as you probably realise that you are saddled with a debt too many. It all starts with an “affordable” line of credit and you tell yourself that “little debt” could not possibly hurt and apply for a credit card that you believe is a low interest credit card. But once you set the ball rolling, you are stepping into a potential trap, unless you are well versed with finance and can exercise total control over the credit lines you are servicing.
Control over your credit lines can only come from the knowledge of making a distinction between good and bad debt and knowing to what extant debt can prove to be bad for you. Here are some points to consider while opting for debt:
The distinction between good and bad debt
The first step towards debt management is knowing what kind of debt you are opting for and whether it is good for you in the first place. To make this distinction- the main question you need to ask yourself is why are you considering taking a line of credit in the first place and whether you can really do without the loan you are opting for?
In the Indian context secured loans such as home loans, vehicle loans, and student loans are considered good debt as they are directed towards an asset creation. Unsecured credit such as easy personal loans and instant approval credit cards that contain a higher element of risk are considered bad debt. This however may be an oversimplification. Small personal loans may be utilised during a medical emergency or even a big occasion in the family such as a wedding. Similarly, a secured credit card can be used judiciously to make household expenses and reap benefits through reward points or cashbacks. Thus, it would be fair to say that good debt is anything that you are confident of repaying within the timeframe being stipulated. If you cannot see yourself repaying the debt in a stipulated time frame, it is probably bad for you.
Here are some other ways in which debt can be bad for you:
You pay a price for debt
Whether you are swiping your credit card at a retail outlet, using your online credit card for shopping online, or are signing loan documents of any sorts, the truth is you are being charged an interest rate for the same. In other words, debt costs you money and the higher the interest rate, the higher you end up paying to your bank. Also, the longer the tenure of your loan the costlier your debt gets. The simple solution to this is opt for credit only when you are real need of it and not applying for credit just because it is available.
You are effectively borrowing from your future income
Each time you make a purchase on your credit card or take a loan you are effectively making a commitment to repay out of your future income. Thus, it is important to consider the need for credit and its implications before making an application for any kind of credit.
Excessive debt can derail you from your financial goals
If you spend a bulk of your salary in making debt repayments, it is quite possible that you either do not have a financial plan, or are ignoring it completely. To lead a successful financial life, you need to make a financial plan and make investments accordingly. Too much debt would naturally mean that you aren’t left with enough money to make investments that enhances your wealth. On the other hand, the adequate amount of good credit (such as a home loan) can lead to asset creation.
Excessive unsecured debt hurts your credit score
If you have taken too many unsecured loans such as personal loans or credit cards, there is a good chance that you will have low CIBIL score. If the credit mix or the mix of secured and unsecured loans is skewed towards unsecured loans, it has a negative impact on your credit score.
May affect your physical health
Lastly but not the least, if you are constantly under stress because you are reeling under the pressure of debt, you are also damaging your state of mind that sooner than later will have physical repercussions. It may lead to a discord in your marriage or family life and may manifest as health problems can be mild or severe.
Having some amount of debt today to fulfil your basic needs is almost a necessary evil in today’s context, but if you steer clear of bad debt and make repayments on time, you have little reason to worry about. Not only will you be able to maintain a strong financial profile you will be able to improve your CIBIL score.
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