The weight of debt can add emotional, relational, and of course, financial stress to our lives. As such, having good money habits as an international student in Australia or any part of the world can help you avoid falling into the debt trap. Read on as we share more about a debt trap and tips to avoid it.

What is a Debt Trap?

A debt trap is a situation where a borrower is forced to take on new loans to repay the existing ones. A debt trap happens when your debt obligations exceed your repayment capacity. In most cases, loans are repaid in two components – the principal and interest amount – over a fixed period.

Contrary to popular belief, a debt trap does not necessarily occur due to expensive or big-ticket loans. For instance, if you earn enough at your part-time job, you can repay your loan without hassle. However, if the monthly instalments are not paid on time, the interest on the outstanding amount will naturally increase, sometimes even incurring late payment penalties. All of these will contribute to the inflation of your overall debt.

Avoiding a debt trap is crucial, especially since it has multiple implications. Aside from financial and credit score consequences, it also leads to serious psychological and social problems. As such, proper funds management, good budgeting habits, and timely repayments are important in ensuring one isn’t trapped in a debt loop during their schooling years. Here’re tips to avoid the debt trap:

1. Avoid Paying with Credit Cards

The thing about credit cards is that you’re essentially spending money that you don’t have yet. While it may seem like a good investment to buy the latest tech gadgets and assume that you can easily pay for it in instalments, sometimes unexpected things can happen; especially if you’re an international student without a fixed monthly income.

If you miss one of these instalments, the banks will start charging you interest rates and late fees – this is when your debt trap starts, and it keeps growing until you begin to feel trapped and helpless. Furthermore, suppose you are unable to pay your credit card debt. In that case, you’ll be considered a defaulter, which will affect your credit score, which can ultimately affect your borrowing capacity in the future.

2. Avoid Impulse Spending

In this modern world of instant gratification, impulse spending has become the new norm. Yeah, we get that the new iPhone looks cool with advanced camera features so that you can take lots of great photos, but it also pushes you into an inadvertent debt trap. So, thinking twice before splurging on anything with your credit card is best.

Instead, prioritise your needs by pinpointing essential, semi-essential, and non-essential items. This will help you curb discretionary spending to live within your means and budget. Having proper awareness of your income and regular expenses does help to nip the risk of debt traps in the bud.

3. Understand Your Finances and Keeping Your Budget in Control

To check how much and where your money is going out, you can create a spreadsheet or put it down in pen and paper. This will help give you a better idea of how much money you’re spending every month.

Furthermore, if you’ve taken on more shifts this month and find your income increasing, be sure not to increase your expenses. We recommend that you use a spreadsheet to keep track of your income, savings, and expenses. Update it at least once a month so that you’re aware of your finances and can properly plan your expenses. For instance, instead of choosing an upscale apartment to rent throughout the school year, you can opt for cheaper alternatives like staying within your university housing or student accommodations nearer to your school.

Y Suites offer affordable student housing across three states in Australia – Sydney, Melbourne, and Adelaide. Situated in the heart of the city and near renowned Australian universities, not only are you able to save time but also on transportation costs.

In addition, Y Suites’ range of student apartments also comes with amenities such as cinemas, gyms, barbeque pits, multi-purpose rooms and more, which will indirectly help you to save money in the long run for other big-ticket items.

Join our Y Suites family today.