What Causes Debt

By Paul Bright

Living a debt-free life is a goal that many people have, especially in tough economic times. But the reality is that almost everyone experiences debt at some point in life, and debt can take years to get rid off. But maybe by understanding the causes and function of debt we can find ways to get rid of it faster.


The basic function of debt is to have something sooner versus later. People go into debt when they borrow money from someone or an institution. Aside from those who are wealthy from birth, most people incur debt just to live in society and advance themselves.


The different types of debt speak to how we get into debt. Credit card debt comes from obtaining credit cards and not paying off the balances immediately or within 30 days of incurring them. Mortgage debt happens when you purchase a home from a bank or institution. Auto loan debt obviously comes from purchasing cars, while student loan debt happens when you borrow money to go to school. These types of debt are also interrelated. 41 percent of student own a credit card. According to a Nellie Mae study, the average undergraduate student carries a $2,200 credit balance and will amass $20,000 in student loans.


There are some benefits to certain debts. Auto loans can get you a car sooner that takes you to work as opposed to hitching unreliable rides or taking public transportation. Mortgage debt can work out in your favor if your house gains equity and is worth considerably more than the payments you make on your mortgage. Student loan debt is often seen as an investment in your future if your advanced degrees gain you better-paying jobs. Paying on these types of “good” debts on time can raise your credit score considerably, making it easier to get any future necessary loans.


Debt totals can add up quickly, especially in America. A Federal Reserve study shows that by 2008 Americans had a revolving debt total of over $962 billion, an increase of $70 billion since 2006. 98 percent of that was credit card debt. 30 percent of people have been 60 days overdue at least once on credit card payments.
The effects of unpaid debt usually start with a bad habit of missing payments in order to incur new debt, like borrowing money to go on a cruise. Missing an auto payment–or any payment for that matter–can negatively affect your credit history. Miss a few car payments and you can face having your car repossessed. This can limit your ability to go to work, therefore reducing your income and making it harder to pay off any other debts. You didn’t necessarily miss the boat, but you’ll be missing your automobile.


The first step you should take to avoid debt is to find out exactly how much you spend and what you spend it on daily, right down to the penny. You would be surprised how quickly three cappuccinos, four trips to the vending machine, three fast food meals and six rounds of online poker can add up to at the end of the week. With grocery prices rising during tough economic times, you may soon discover the “sticker shock” when you actually study your receipts.

One of the best solutions to debt is to avoid the cycle of incurring more new debt to pay off old debt. Consider what you can actually afford versus what you want should you decide to make a purchase that would put you in debt. You may work hard and feel that you deserve a newer, better car but if the one you have works just fine, why pay more?

Another tip on avoiding debt is to pay for your daily expenses with cash. Leave the credit cards at home unless you plan on making a large purchase.