5 Main Causes of Debt

There are thousands of reasons that an individual needs money. As such, there are thousands of reasons that an individual falls into debt.

Knowing all of the main causes of debt can help you prepare for your own possible debt and credit problems or, at the very least, help you make informed decisions when choosing credit and lending sources.

 

1) Ignoring Debt
Ironically, one of the main causes of debt arises from people that ignore their debt. Fees and rate increases can cause a little bit of debt to become a mountain of debt in a very short time. A single missed payment can cause an APR to jump from 10% to as high as 29% depending on the credit card, and loan lenders can charge a great deal of extra fees if your contract allows it.

2) Store Credit Cards
"Would you like to save 10% on your purchase today by signing up for one of our store credit cards?" Far too many people decide to sign up in order to save a little bit of money on the purchase, and these same individuals are finding themselves in a great deal of debt. There are several problems with signing up for store credit cards:

• They often have significantly higher interest rates than your standard credit card.
• Each new credit account you sign up for lowers your credit score, which makes future credit cards have higher interest.
• They are so easy to sign up for that individuals are able to purchase more in a shorter time and are unable to pay all of them back.
• They are easy to lose track of and thus miss a payment causing greater fees and significantly more money owed than you would have saved if you did not take out the credit card.

While saving 10% may seem like a good idea at the time, the risk is not worth the reward. Pay with cash or a standard credit card in order to keep your debt in once place and keep track of your finances.

3) Taking Out More Money Than You Need
Loans should always be limited to the exact minimum you need, nothing more. Often people are tempted to take out higher loans in order to "make life easier" and "keep some money in the bank" but as the interest accumulates the debt increases, and these same individuals find themselves living harder than necessary.

4) Divorce/Family Health Issues
Family troubles are a significant source of debt, and these are also the hardest to avoid. The best advice is to keep some money aside in case of emergencies so that any credit or loan you need can be kept to a minimum.

5) Cars/Homes
Luxuries like expensive cars or larger-than-necessary homes are simply not worth the debt when an individual doesn't have the financing necessary to make all of the payments. Even if you can scrape by and make all the payments, if something arises such as a family emergency, it is likely you will need to take out a loan and incur a great amount of debt.

By avoiding these five causes of debt , you can help keep your finances in check and maintain a good credit history while making smart decisions about how to handle your money.

 




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