Why Do Consumers Get Into Debt?

Debt can lead to garnishment of wages, loan defaults, higher interest rates and poor credit scores. In general, debt is something you want to avoid, although certain types of debt are unavoidable. People fall into debt for myriad reasons, from job loss to overspending.

Credit Cards

Credit cards can seem enticing. After all, a credit card allows you to make purchases without having to initially spend your own money. Additionally, many credit card companies offer cash back, travel and entertainment awards to draw customers. Credit cards also serve as a primary way to build credit, but in the hands of someone who lacks financial discipline, credit cards quickly drive a person into debt. Once people fall behind on their credit card payments, they often can't afford anything more than the minimum payment. The minimum payment satisfies the credit card companies, but it tacks on more interest and makes it nearly impossible to catch up to the actual balance. In December 2010, the total credit card debt in the U.S. was more than $2.4 trillion, according to the Federal Reserve.

Loans

The largest purchases people make, such as a home and car, normally require that person to take out a loan to pay for the purchase. Most people don't have an extra $200,000 laying around to buy a home, so naturally they must apply for a mortgage loan, putting the person in debt. Loans present a fixed expense problem. For example, if someone is in debt because he spends too much in entertainment each month, he can change his spending habits and begin to save money. A loan, however, is a fixed payment; you can't change the payment from $300 per month to $50. So, when someone can no longer afford the loan payment, their debt increases until they can catch up. In the third quarter of 2010, mortgage debt totaled more than $13.9 trillion, according to the Federal Reserve.

Poor Spending Habits

Some people struggle with financial discipline, and once poor spending habits begin, it's difficult to reel those habits in. Poor spending habits often accelerate credit and loan problems because the person's available funds dwindle and they find it more difficult to make timely payments.

Unemployment

While unemployment insurance can keep someone above water for a little while, it doesn't provide the person with the same level of income he had when he was employed. The loss of expected income can quickly lead to debt from credit card, loan and regular bill payments. Additionally, if the person cannot find a job, they risk losing their unemployment benefits. The duration of unemployment benefits varies state-by-state, but generally the maximum number of weeks ranges from 46 to 79, although extensions are available. Some people do not qualify for unemployment insurance, which hastens debt for individuals or families who have a lot of bills to pay.