How Do People Fall Into Debt?

Debt in America is epidemic. According to CNN Money, the average American household with one credit card has more than $10,000 in credit card debt. Despite all of the warnings from the media, parents and friends, people continue to fall deeper into debt. There are countless reasons why people will fall into debt, some of which may be beyond their control. Regardless of the cause, the effects and consequences of extreme debt are severe.

Causes

Poor money management, bad spending habits, job loss, illness and unforeseen circumstances are some of the main reasons people fall into debt. In addition to borrowing for purchases, medical care and home and auto repairs, interest fees compound the problem. Common mistakes that lead to extreme debt are failure to pay off credit cards, late payments and using credit cards to pay for living expenses.

Effects

There is no question that extreme personal debt threatens your financial security. People end up living paycheck to paycheck with no funds set aside for emergencies. Once a person's credit is maxed out, there is no credit or money left to cover unforeseen circumstances. The National Foundation for Credit Counseling calls this debt paralysis. Stress levels increase as debt increases and your ability to pay decreases, affecting your health, relationships and leading to more financial problems. Credit ratings are also affected as debt increases. High credit balances, minimum payments and late payments all work against a credit score.

Consequences

Extreme debt can lead to a number of troubling scenarios. Judgments and liens on your property are a definite possibility if you cannot meet your monthly obligations to your creditors. The lower credit score that accompanies debt problems makes you a bad risk. It is difficult to obtain auto loans, get a job and can even result in an increase in insurance premiums.

Solutions

You can choose to systematically pay down debt, cash out savings and retirement accounts, borrow against your life insurance, take out a loan, seek consumer credit counseling or file bankruptcy. Paying off debt is the best solution if you are in a position to make regular payments.

There are different strategies for paying off debt quickly, one of which is the snowball method. The snowball method involves paying higher than the minimum on one account until it is paid off, then adding that amount to another payment until is paid off. The process is repeated until all debt is paid in full.

Prevention

Understanding how to use credit is essential to keep from falling into debt. CNN Money suggests not using credit for things you will use quickly, like food or trips, or if you will not be able to pay off the balance within one or two months. Bad debt is any debt you owe for something you neither needed nor could afford.

Mortgages and student loans are considered good debt, provided you don't borrow more than you can afford to pay back. You should also save for high priced items rather than financing them. Keeping track of the money you spend is always a helpful tool to avoid debt. Living on cash will keep you out of debt.