Understanding the Sources of Debt

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Getting out of debt is only half the battle.   Living a debt free life is the other half.   In order to make sure you don’t follow in the same steps as before, it’s important to understand the sources of credit card debt and how you got there.   Debt didn’t accumulate over night right?

Getting an insight on how most people get into debt is important because it helps identify the problem.   When you identify the problem, you can create a sound financial plan to get out of debt.   Here are some reasons for the most prevalent reason on why people get into debt.

  1. Consumer Culture- Technology in the present world is making consumers more media driven.   Success is defined by having nice cars, houses, or the latest electronics.   This leads to consumers spending more money than they actually make, and having the mentality of “buy now and pay later.”
  2. Easy Access to Credit- Having a high credit limit creates an illusion of having “free money.”   Credit cards companies market “reward points” to initially get people into the door.   As a result, everyone is using plastic and charging everything on their credit card to rack up those points.   This is why having a low credit limit is important.   Having a high credit limit doesn’t mean that your credit score will be better.
  3. Not enough Savings- Most people get into debt because of unforeseen financial expenses.   This can be an auto repair, home repair, or medical emergencies.   Having an emergency fund or savings fund will keep you away from charging your expenses on your plastic.
  4. Lack of financial literacy- Some people in debt fail to evaluate credit offers properly and sign up without reading the fine prints.   They don’t understand the interest rates and finances charges and aren’t proactive to create a budget to monitor their spending.
  5. Financial Setbacks- These include a loss of job, reduction of hours, a death in the family, or unexpected costs.   All these expenses should be covered by your savings, and if not, it should minimize the amount you have to put on your credit card.

Once you understand how you got into debt in the first place, you can take actions to make sure you don’t fall back into the same place.   Create a game plan to keep yourself accountable!


One Response

  1. John (Vikas Sharma)

    May 12, 2012 4:02 am

    You are absolutely right Kevin. Only coming out of debt is not important, what is most important is not falling in the trap of debt again. Only then you can lead a debt free life.
    And to lead a debt free life you will have to change your habit of splurging money. The reasons that you have mentioned above are really true.
    These days generally people becomes get ridden because of show off. To show off their status they spend money without planning. they buy those things which are not essential. One should avoid this habit.


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