Avoid the Debt Trap
16 Jul 2015
It’s important to understand the difference in types of debt. Some is constructive and some is destructive. An example of constructive debt is a home mortgage. Rarely can people save enough money to pay cash for a home, and it’s perhaps unrealistic to expect to do so. By contrast, destructive debt is the kind that drains assets through interest charges, such as the onerous charges some people pay on multiple consumer credit cards.
When looking into a loan or line of credit, be wary of those who are willing to extend credit without making you jump through a few hoops. They likely are not looking at the whole picture. You need to be cautious that your overall debt to income ratio is in check. Even though a lender may be comfortable with a 40 percent income to debt ratio, are you?
Ultimately, you don’t know when the washer or dryer will break down, your car’s transmission will fail, or your kid will break an arm and need to go to the emergency room. Maybe you lost your job. Destructive debt can pile up fast if crisis situations like these arise.
Consider an alternative with a good budget that will build up emergency savings to sustain you in such situations. You must be diligent in contributing to that fund and not divert the money to other uses even after your emergency savings bucket is full. That way if you ever face a true emergency and deplete your emergency savings, you will have a line item in your budget to replenish it. This will help you avoid the debt trap.