Here are some mistakes that you as a consumer need to avoid to manage your debt responsibly and keep your credit history intact:
1. Borrowing without a definite plan: With intense competition among lenders, one has access to easy credit. However, just because it is available does not mean that you have to avail of it. If you must take a loan or make a certain purchase with your credit card, make sure you have enough reasons to do so and have a definite plan in place for the repayment.
2. Falling into the 'minimum payment' trap
Think of your credit card as your best friend. But it can well turn into your worst enemy if you don't make timely repayments. You may think you have salvaged yourself by paying the minimum amount due on your outstanding amount, but you need to know that this payment only services the interest amount and does not reduce your principal amount borrowed. You, therefore, need to ensure that you pay off the outstanding amount within each billing cycle of your card or at least allocate the highest amount possible towards repayment.
3. Not looking at credit card/bank statements
Statements sent to you by your lenders portray a true picture of where you stand financially. You may think that you are keeping a check on your spends through your online transactions, but it's in your interest that you review these statements as well. This way you can not only see if you are keeping good health financially, but can let your bank know in case of any discrepancies. This is also to ensure that your lenders submit the correct information about your loan accounts to the credit bureaus.
4. Borrowing from one source to pay off another
When you find that you are unable to make a certain payment within the stipulated deadline, you may be in a state of panic and end up borrowing from one source of debt to pay off the one in question. For instance, you may end up taking an expensive personal loan to pay off a credit card bill. Such kind of practices must be avoided at all costs as you will only dig up a bigger hole for yourself. You may instead consider speaking to your lender to provide you with some temporary relief till you can arrange funds for repayment.
5. Eating into your emergency fund
When you find yourself unable to pay off a certain debt on time, you may be drawing solace from the fact that you have substantial emergency funds you can use to make this payment. However, this beats the very purpose of an 'emergency' fund, which must instead be saved for a rainy day. It's a better idea to try to manage your money prudently and spend as less as possible in order to pay off your debt in hand.
Each debt pile is different and must be treated differently. However, avoiding these cardinal mistakes in debt management will ensure that there are no major pitfalls along the way.
Disclaimer: All information in this article has been provided by Creditvidya.com and NDTV Profit is not responsible for the accuracy and completeness of the same.