About Financial Debt

Times of recession are times of rising debt. The act of owing is a carefully balanced juggling performance that many lose to bankruptcy. Even though some debt is "good," most people find it stress-inducing and restrictive. As American debt rises, people often seek out other methods to keep cash flow going. Because debt often produces worry, fear and anxiety, some of these solutions that seems smart in times of desperation end up being a big mistake. Financial debt is a fact of life, but it's one that inflicts a large toll.

Size

Debt is an American fact of life. Ben Woolsey and Matt Schulz of CreditCards.com cite a U.S. Congress study that states, "In 2007, before the recession began, 14.7 percent of U.S. families had debt exceeding 40 percent of their income." In the United States, cardholders carry an astounding $972 billion in credit card debt, with an average load of $8,300 per household (both cardholders and noncardholders) and $10,690 (just cardholders). College graduates leave school nearly $20,000 in the hole.

Effects

Because of such a huge amount of debt, American citizens find it hard to save and bounce back from financial emergencies. High amounts of debt make it harder for families to pay for higher education, amass assets and save for retirement. During times of recession, consumer spending is often a catalyst for fiscal recovery; however, times of extreme duress make people hunker down and reduce spending. Debt also causes personal stress, depression, shame, relationship problems and anxiety - all conditions that reduce life expectancy and productivity.

Types

There are myriad ways for a person to be in debt. However, some types of debt may be better than others. For instance, college loans are seen to be "good debt," as is a mortgage. Ostensibly, these loan products pay off in increased earnings and value in the long run. Most other debt, however, is pretty much bad. Credit card and other revolving debt is usually generated on items that will decrease in value, such as clothing or vacations, and a car is instantly less than its loan amount the moment it leaves the lot. However, since all these debts all accrue interest, the consumer ends up paying a pretty penny for a depreciating investment.

Geography

Certain areas of the United States have more debt than others. Miami, FL is the credit card debt capital of the country, with Tampa, FL, Los Angeles, CA, and Jacksonville, FL coming in behind. According to Lauren Sherman of Forbes.com, "While the median household income is a moderate $43,333...average credit card debt in each home is $9,797.38. That means to pay off outstanding credit card bills, debtors would have to forgo 22.61% of their incomes." High debt numbers are attributed to high unemployment, plunging house values and increased cost of living expenses.

Warning

Although credit card, mortgage and car debt may seem daunting, they're still better than the payday loans that many poor people obtain to make ends meet. With an average top amount of $500, many borrowers flock to the high-interest loans as a stopgap when no other financial institution will lend to them. Because of exorbitant compound interest, the loans end up costing a huge amount more than the principal for most. According to Ben Popken of Consumerist, "Payday lenders stoke demand for more loans with loan terms that encourage rapid re-borrowing." With some companies charging 36 percent interest, this is some of the most dangerous debt around.