A good debt management plan can help people better organize their finances and increase their credit scores. However, an individual cannot have a debt management plan if they do not know the causes of the common types of debt.
Credit Cards
According to the Federal Reserve Bank of New York, American households owe approximately $827 billion in credit card debt alone. This is one of the leading causes of debt because credit card companies offer easy access to credit, which people can use without making significant changes in their spending habits. One way to avoid credit card debt is to take responsibility for your actions and quit using your card on impulse purchases.
Medical Expenses
Medical expenses can add up quickly and drastically alter your financial stability. Health care costs are rising as more people are hitting their senior years, which makes it impossible to pay for medical expenses without taking out some type of loan or credit card, both of which come with high-interest rates. With the rising costs comes the need for more people to make their payments on time, which could cause them to be late on other bills and risk personal debt.
High-Interest Rates
If you have been choosing loans with higher interest rates than usual, you may have taken on a considerable amount of debt. For example, if you take out a payday loan and it comes with a 15% interest rate, you will pay $153 on interest alone when your original loan is just $365. Hence, the more you take high-interest loans, the higher your chances of being in huge debt and less likely to have the highest credit score.
High Living Expenses
According to the U.S. Bureau of Labor Statistics, the average American household spends $39,304 on housing per year. If you take on more debt to pay for a home, you will have less to put toward other necessities, and you could risk the stability of your entire financial picture.
Expensive recreational activities
People who spend money on expensive vacations and exotic purchases can easily become overwhelmed with borrowed funds. It is important that people are responsible for their spending in this area because it will limit their ability to pay off debt, leading to some very serious financial repercussions in the future.
Lack of savings
If you do not keep enough money in your savings account to cover purchases, you will be forced to take on more debt to pay for everyday expenses such as food, utilities, and transportation. There will be no money left over for medical costs or unexpected emergencies, which could lead people into different types of debt.
Extravagant lifestyle choices
People can easily spend more than they earn when they are not careful with their spending. If you prefer to live an extravagant lifestyle, then you may have to make some lifestyle changes to balance your spending responsibly.
Fraud and identity theft
According to the Federal Trade Commission, Americans lost approximately $27 billion to identity theft in 2021, which is a 20% increase from 2020. This is a huge cause of debt because people could lose their income for several months before it is restored, and this could cause them to take on new debt or miss payments that come due during this period.
High utility bills
Utility prices are increasing at a rate that is far faster than inflation. These bills have become overwhelming, especially to people with a small income. These individuals are forced to get into various debts to sustain their lives.
Unqualified/fraudulent loans
People who take out loans from private lenders can easily be defrauded. In order to protect yourself and your credit, it is a good idea to educate yourself about lending options and carefully read any loan agreement you are presented with.
When it comes to debt, the most important thing is to make sure that you have a plan in place to stay on top of it. Your plan should include your monthly budget and include how you can spend money on emergencies and investments, savings, retirement, and insurance to avoid personal debt.
