🚫 Step 5: Avoiding Bad Debt & Understanding Credit — Protect Your Financial Health

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🚫 Step 5: Avoiding Bad Debt & Understanding Credit — Protect Your Financial Health

You’ve tracked your expenses, created a budget, started saving, and begun investing. Now it’s crucial to understand debt and credit — because mismanaging these can undo all your progress.

“Debt is like any other trap, easy enough to get into, but hard enough to get out of.” — Henry Wheeler Shaw

💡 What Is Good Debt vs. Bad Debt?

Type Description Examples Should You Take?
Good Debt Borrowing that helps you build wealth or improve earning power Home loan, Education loan, Business loan Yes, but only if manageable
Bad Debt Borrowing to buy things that lose value or don’t generate income Credit card overspending, Personal loans for shopping, Payday loans Avoid or repay ASAP

🚨 Why Is Bad Debt Dangerous?

  • High-interest rates (sometimes 24%+ on credit cards)

  • Can trap you in a cycle of paying interest and fees

  • Hurts your credit score, making future loans expensive or impossible

  • Adds stress and reduces financial freedom

🧾 Understanding Your Credit Score

Your credit score (300–900 in India) tells lenders how reliable you are at repaying debts.

  • Good credit score = Easier loans + Lower interest rates

  • Bad credit score = Higher interest rates + Loan rejections

📌 Tips to Avoid Bad Debt and Improve Credit

  1. Pay your credit card bills on time and in full
    Avoid carrying a balance to dodge interest charges.

  2. Use credit cards wisely
    Treat them as a convenience tool, not extra money.

  3. Borrow only what you can repay
    Calculate EMIs carefully before taking any loan.

  4. Avoid multiple loans at once
    It’s harder to manage and increases your debt burden.

  5. Check your credit report regularly
    Fix errors and keep your score healthy.

💡 Smart Ways to Manage Debt

  • Prioritize paying off high-interest debts first (like credit cards).

  • Consider debt consolidation if overwhelmed.

  • Negotiate with lenders for lower interest or flexible terms.

  • Avoid using loans to fund lifestyle expenses.

🔐 Final Thought

“The safest way to double your money is to fold it over and put it in your pocket.” — Kin Hubbard

Debt can be a useful tool — but only if used wisely. Mastering debt management is a critical step on your journey to financial freedom.


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