Introduction to Debt While interacting with your elders, you would have realized that there’s a scary financial ghost that can eat away all your savings. This ghost is debt. Is it debt, a boon, or evil? You will be able to decide for yourself by the end of this article.
The Toxic Relationship between Debt and Personal Capital
If you are given an option between LED bulbs with the same power but priced at Rs100 and Rs1000, which one are you most likely to choose? The cheaper one, of course, even though it serves you several times shorter
- We tend to make choices that appear easy on our pockets
- It is not necessary that every cash outflow adversely affects your Capital, just like it is not all bad
How Much Should I Borrow?
As much as you can digest healthily, because, overeating will harm you.
- If you don’t want to be a victim of a debt trap, you must be aware of your existing income sources and your current expenditure. Debt Repayment
- There are two main strategies to paying off your debt
- The Avalanche Method
- Pay the debt with the highest interest rate first
Factors Determining Your Credit Score
Repayment history
- Utilization of credit balance
- Duration of credit or loan
- Credit mix
- Maintaining your credit score
- Pay off the loan balances
- Check and correct your credit report regularly
- Increase your credit limit
- Manage your credit cards carefully
Liabilities
Liabilities refer to anything that would cause a cash outflow
- When you take a loan, there will be the following impact on your Capital
- At the time of taking the loan, the increase in liability reduces your Capital.
- As you pay the loan off, your liabilities decrease but so do your deposits
- The interest paid on the loan reduces your True Assets as well
- Once the interest starts compounding, your capital starts decreasing rapidly
Good Loan vs. Bad Loan
Good loan: An investment made to improve your financial position
- Increases your Capital in the long run by either growing in value or by helping you generate income
- Bad loan: Takes for assets that might not be able to generate future income or taken for those goods whose value depreciates fast
- Check the interest rate
- Revisit the repayment terms
- Review your ability to pay back the loan
