Debt has a tendency to keep stacking up. Paying on credit is common for many Americans, and so suddenly finding yourself overwhelmed by high interest and suffocating debt can happen to anyone, at any point in their life.

The reality is that many people have a difficult time living debt-free. And while a little debt is fine and can even be good for maintaining strong credit, too much debt becomes dangerous and comes at a high cost. Failure to repay debtors can result in higher and higher interest costs that eat away at your cash flow.

Pushed too far, and you may find yourself needing to declare bankruptcy. That can just wipe away your chances of getting more credit terms from a bank, a credit union or other financing company for up to 7 years!

As long as you are smart and don't have poor money management, these outcomes can be easy to navigate, even for those that earn a low income.

As for debt, it can appear from a variety of situations. There are many different causes of debt, most of which will be covered in this article. Being aware of these causes of debt will be useful as you build your own financial wellbeing.

‍

What are the most common causes of debt?

Although most people think that debt is simply the result of not paying your loans on time, it's much more than that. Sometimes, extenuating circumstances dictate just how much money you'll need. Being aware of the most common causes of debt will give you a better chance of avoiding these common traps.

‍

Inefficient Financial Planning

Poor money management is a common issue that leads to increasing amounts of debt for many. Inefficient financial planning means all sorts of things, from paying unnecessary out-of-pocket fees or penalties to higher interest.

One of the most common ways to keep your debt ceiling low is to ensure that all debt payments are paid on time. This will reduce penalties and out-of-pocket fees that don't go directly towards debt repayment. Simply put, avoid the silly mistakes.

Debt consolidation is another tool that is at your disposal. If you have various creditors, debt consolidation is a method to lower your blended rates of interest and simplify your financial life.

Ideally, you always want to have a couple of months of advance savings in case a financial emergency happens. This method will ensure that you'll still be able to pay outstanding debts while planning out your next step. Overall, be intentional and detailed when it comes to reviewing your bank statements and bills. This is a great practice that will show you the best way to optimize your personal finance, and cut out bad spending habits.

‍

Lack of an Emergency Fund

An emergency fund exists to prevent unexpected spending. Its sole purpose is to have enough money to cover any unforeseen issue that may happen.

It might be impossible to consider at the moment since emergency funds can be difficult to build up. Still, even a couple of hundred dollars can be helpful with resolving potential financial issues. It will also help you make loan payments on time, protecting your credit score.

‍

Student Loan Debt

Many young people opt for student loans to help them push through the financial costs of going to college or university. Student loans come with promises of higher earnings down the road, but this can also be a dangerous mindset to fall into. It's easy for debt to pile up during these early years, so it's important to ensure you only borrow what you absolutely need. There may be many nights of Ramen noodles ahead of you, but your future financially savvy self will thank you. Make sure you explore debt relief options for students. The Biden Administration has wiped away billions of dollars of debt for students around the country.

‍

Job Loss

We've all been there. The sudden loss of a job or a pay cut can drastically impact your financial future as well as the present, and it's a risk we all face. Here is some of our best advice even for those with great paying jobs: You never know when you might lose or need to leave your job, so be reasonably frugal with your finances and save for all contingencies. Don't overspend based on today's income.

What's that mean? Build up your emergency funds savings to avoid the need to resort to credit card debt or other methods of getting access to cash. The key here is to be aware of what you can and can't afford. Do not take loans that you can't repay, especially while you're not employed. Consider a second job if that makes sense to you so you don't keep all of your eggs in one basket.

‍

Not Preparing for Unexpected Expenses

Life is not perfect and neither are the things we purchase. Your car may break down or your washing machine needs to be fixed. Both of these are examples of expenses that we weren't expecting. Many homeowners encounter these other forms of expenses on a weekly basis!

One way to counter this is by having a good insurance policy that will cover (at least partly) some of those expenses. Additionally, you can use your savings for this but just remember that you shouldn't spend money on such issues unless absolutely necessary. After all, you'll want to clear that debt quickly.

‍

Relationship break up with a partner

Believe it or not, one of the most common reasons for taking on debt is a break-up. Sharing household expenses between two incomes can be great when balancing your checkbook. When that luxury disappears, it's not uncommon to find people taking on more debt to maintain their previous standard of living or pay child support.

Another frequent circumstance is when a partner takes advantage of another and loads them up with debt before splitting. If this resonates with you, we're sorry, and we despise your former partner. Don't take on debt for others to just get access to more money. It's bad financial practice and could leave you high and dry.

Make sure you're never too reliant on your partner to maintain your living expenses.

‍

Too much reliance on your credit card

Credit card bills can be suffocating. Although we've now gotten used to having a few credit cards in our wallets, the reality is that you should never heavily rely on them. The thought of 'always having money' is enticing, but ultimately can cause you to overspend.

If you do already have a couple of credit cards, consolidate credit card debt and create a viable repayment plan. Don't even get us started on the interest charges! Try spending within your existing income and budget levels to avoid burdensome credit card costs.

‍

Living costs are too high

Today's housing market is volatile and pretty expensive. A basic home will set you back a few hundred thousand dollars, which isn't affordable for most people with debt and bills to pay. After you mortgage, utilities and some basic essentials, keep your living costs to a minimum. For example, basic practices like turning the lights out keeps your utility bills from getting too high. Opt-out of premium cable packages and eat in more often than you eat out. Choose public transportation and other services that reduce your daily living expenses.

You've heard this before, but one way to save money is to build and stick to a monthly budget. Saving is much easier if you stick to a budget.

‍

Medical expenses and emergencies

Health care and health insurance are immensely expensive in the United States. Even if you get insurance, chances are you'll still have to spend a lot of cash paying your medical bills. As an example, a simple fall can cause you to end up in the ER with a couple of thousand dollars in expenses.

Additionally, certain illnesses are serious and require constant care. These can be even more expensive than a single visit to the hospital. Ideally, you would have some money in your emergency fund, but what if your medical expenses exceed that amount of money? If you find yourself in one of these uncomfortable situations, you should check with a debt support charity or specific benefit department about your case to see if they can help.

‍

Lack of a budget!

Having a budget is imperative to keeping your finances in check. If you don't know how much money you have and how much you can spend, you may end up in a lot of trouble.

The entire spending plan doesn't have to be difficult or complex. Simply take a look at your income, deduce the amount you need for bills, required payments to pay off your existing debt (if any), and create a budget. Keep unnecessary expenses at a minimum so you can build a debt-free future.

‍

Final Words

These are just some of the main causes of debt but they're the most prevalent. Living a debt-heavy life is tough and can turn sour really quickly. If you're planning on taking out a loan, or if you already have one, be mindful of how much you owe and develop a plan to repay it as quickly and efficiently as possible.

Having proper financial education can mean the difference between minimizing problems and struggling to make ends meet. You've now learned enough to get a basic understanding of how to reduce the chances of your debt getting out of control. Educate yourself and take responsibility. Good luck!

‍