10 Ways People Rack Up Debt

More than half of all Americans have some kind of debt.
Andrew Bret Wallis/Getty Images

According to a 2010 Gallup survey, Americans identify terrorism and government debt as the two most worrisome issues to American wellbeing [source: Saad]. If Americans are so concerned about the government's debt, why aren't we worried about our own debt? More than half of Americans are in debt and paying interest on it. Many blame credit cards -- and rightfully so; they are a major culprit. But there are a number of ways people rack up debt. Read on to see 10 ways we accumulate debt.


10. Lack of Communication About Family Finances

We all know the drill. We've either seen it in a movie or in real life. It's either the wife sneaking in a big shopping bag from an expensive designer store or the husband hiding the latest electronic gadget in his office drawer. The sad reality is most family members and spouses do not communicate about their financial positions. While one shopping bag or Amazon purchase can seem insignificant, they can add up over time. In fact, they often add up to more than the household can afford, forcing the family into debt. Not only is it important to understand your financial capabilities, it is just as important to share them with every family member who has the ability to add to household debt.


9. Gambling

People all over the world rack up significant gambling debt each year.

If you've ever played the lottery or made a bet on a football game, you've gambled. While a dollar lottery ticket may seem innocent enough, many people across the globe rack up significant gambling debt each year. In California, 1 million residents are addicted to gambling. To counteract the problem, the state has created a voluntary ban from casinos [source: Trujillo]. But now that online gambling sites are bringing casinos into homes and dorm rooms, gambling has become extremely accessible, and the problem is spreading. With easily accessible loans and odds that rarely favor the gambler, it's easy to see how gambling debt can get out of control.


8. Inadequate Savings

Saving for retirement isn't a hard idea to grasp -- save money while you have it, so you can build up savings for when you're no longer working. Yet, the idea of saving for the future is lost on many young people. A recent study found that, starting with the baby boomers, the percentage of savings per generation starts to dwindle about 10 percent each generation [source: The Wall Street Journal]. Not only does this leave many ill prepared for retirement, it leaves them without proper savings for the unexpected. Bills for medical emergencies, life-changing events, hurricanes and other surprises can easily force someone with inadequate savings into debt.


7. Lack of Money Management Skills

Teaching young people how to manage finances is a tool that can help them avoid significant debt later in life.
David Sacks/Thinkstock

Most of us never took a class in high school or college on how to manage money. So, when do we expect young people to learn how to manage their finances and stick to a budget? It seems to be a trial-and-error process, emphasis on the error. A recent study of young adults ages 18 to 34 reports this age group has the second highest bankruptcy rate in the United States [source: Dunleavey]. Despite having sufficient salaries, many young people's lack of knowledge on money management and investing has forced them into debts that could have easily been prevented.


6. Divorce

There's ongoing debate about whether or not money is a leading cause of divorce. However, there is no debate that divorce causes even further financial problems. Not only is the process of divorce expensive, one spouse's debt could be assumed by both parties as finances are split. If one spouse racked up thousands of dollars in credit card debt on a cosigned card, both spouses will be responsible for the bill. Additionally, if divorce occurs in one of the nine states that follow common property laws, both parties are responsible for debt obtained during the marriage even if only one spouse is named on the loan or credit card.


5. Keeping Up with the Joneses and Impulsivity

"I want it, and I want it now!" With the plethora of online shopping options available today, anyone who utters this phrase is in luck. Yet the impulsivity of online shoppers coupled with the strong desire to keep up with the latest and greatest of everything is a dangerous combination, sending many into debt. If your co-worker has the latest iPhone with video, it suddenly makes your year-old model seem obsolete. Even though your iPhone is working perfectly and you don't get paid until next week, with the quick swipe of a credit card, the new iPhone is yours. This is just a small example of this phenomenon. Many families find themselves living in a house they cannot afford with a luxury car parked in the driveway. From the outside, they may draw many a jealous eye, but upon closer inspection, they're drowning in debt.


4. Reduced Income, Same Expenses

Since the economy slowed to a screeching halt, unemployment has been high. Many have lost their jobs or have been forced to reduce hours, and therefore receive a lower income. Additionally, many have had to rely on stock dividends that have significantly decreased in value as a supplement to their income. At the same time, bills and expenses remain constant, forcing many into debt. While there are certain bills and expenses that will not change (mortgage payments, car loans, utilities), many others can and should be reduced to cover the difference. However, having grown accustomed to a particular lifestyle, many continue to spend beyond their reduced income and end up with major credit card debt.


3. Credit Cards

Don't have the money now, but can't live without that pair of shoes? Credit cards make this purchase possible. They allow you to rack up serious debt while only paying of a minimum fee each month. That means you could purchase the shoes, the dress, the bag and the perfect necklace for your party and only pay $20 when your bill comes at the end of the month. Sounds like a pretty sweet deal, doesn't it? Well, what many people don't pay attention to and what the banks don't advertise is that the remainder of your debt continues to grow through high interest rates and fees. You think you're in the clear, because you can afford the minimum payment each month, but you lose sight of your total debt, which can become out of control. Credit card debt is a problem for a lot of people. In the first quarter of 2010, banks wrote off $18.7 billion of credit card debt that cardholders could not afford to pay [source: Arends].


2. Home Mortgages

Foreclosures are on the rise because many homeowners are upside down on their mortgages, meaning they owe more than their house is worth.
Ariel Skelley/Getty Images

Thanks to the housing bubble bursting, many people find themselves upside down on their home mortgages, meaning they owe more on their mortgage than their property is worth. This leaves many homeowners stuck in houses they cannot afford and they cannot sell. So what do they do? They stop paying the mortgage payments. If a homeowner can no longer make their payments, the bank will seize the property. Often this is the only option for the homeowner who cannot pay. Their remaining debt on the house is forgiven and written off by the bank, but the homeowner's credit is damaged for years. Due to an extremely long foreclosure process, the homeowner is often able to continue living in the house without making payments, while the bank processes the foreclosure.


1. Student Loans

Students who finance their educations can end up with huge student loan debts by the time they graduate.

Not only has college tuition increased, so have the number of students attending college, making it more and more necessary to obtain a college degree to find a job. That means more and more people are going into debt because of student loans. Financial sources predict the federal government has given out almost $300 billion in student loans over the past four years [source: Pilon]. Student loans are a bit trickier than other loans. They can be deferred, which is helpful to students seeking multiple degrees. But, they can also come with hidden charges and fees, and will not be forgiven in bankruptcy. So, while at first a student loan may have seemed like a responsible decision, many students are faced with growing debt that has no hope of diminishing.

Lots More Information

Related Articles

More Great Links

  • Gibbs, Adrienne. "Hiding Credit Card Debt." Nova Debt. (Oct. 2, 2010) http://www.novadebt.org/news/hiding-credit-card-debt.html
  • Trujillo, Ron. "Gambling addiction? Ban yourself from cardrooms." Sacramento Business Journal. August 13, 2010. (Oct. 2, 2010) http://sacramento.bizjournals.com/sacramento/stories/2010/08/09/daily65.html
  • WSJ Editor. "Spendthrift Boomers Face Perilous Retirement: McKinsey." The Wall Street Journal. June 5, 2008. (Oct. 2, 2010) http://blogs.wsj.com/economics/2008/06/05/spendthrift-boomers-face-perilous-retirement-mckinsey/
  • Brobeck, Stephen. "Making Household Savings a Priority." American Saves. 1999. (Oct. 2, 2010) http://www.americasaves.org/about/household.asp
  • Mueller, Karin Price. "Help! My post-divorce debt is killing me!" MSN Money. (Oct. 2, 2010) http://articles.moneycentral.msn.com/Investing/HomeMortgageSavings/help-my-post-divorce-debt-is-killing-me.aspx#pageTopAnchor
  • Dunleavey MP. "Young, carefreeā€¦ and deep in debt." MSN Money. (Oct. 2, 2010) http://moneycentral.msn.com/content/collegeandfamily/moneyinyour20s/p105691.asp
  • Fetterman, Mindy and Hansen, Barbara. "Young people struggle to deal with kiss of debt." USA Today. Nov. 22, 2006. (Oct. 2, 2010) http://www.usatoday.com/money/perfi/credit/2006-11-19-young-and-in-debt-cover_x.htm
  • Pilon, Mary. "The $555,000 Student-Loan Burden." The Wall Street Journal. Feb. 13, 2010. (Oct. 2, 2010). http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748703389004575033063806327030.html
  • Weston, Liz Pulliam. "Money isn't the culprit in most divorces." MSN Money (Oct. 2, 2010) http://articles.moneycentral.msn.com/CollegeAndFamily/SuddenlySingle/MoneyIsntTheCulpritInMostDivorces.aspx
  • Bleker, Anna. "Divorce and Debt: Advice on Dividing Up, Paying Off Debt." Fox Business. Aug. 24, 2010. (Oct. 2, 2010)http://www.foxbusiness.com/personal-finance/2010/08/24/divorce-debt-advice-dividing-paying-debt/
  • Saad, Lydia. "Federal Debt, Terrorism Considered Top Threats to U.S." GALLUP. June 4, 2010. (Oct. 2, 2010)http://www.gallup.com/poll/139385/federal-debt-terrorism-considered-top-threats.aspx
  • Woolsey, Ben and Schulz Matt. "Credit card statistics, industry facts, debt statistics." CreditCards.com. Aug. 24, 2010. (Oct. 2, 2010)http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php
  • Rowley, Laura. "Keeping Up with the Joneses Can Put You Behind." Yahoo Finance. July 6, 2006. (Oct. 2, 2010)http://finance.yahoo.com/expert/article/moneyhappy/7254
  • Arends, Brett. "Credit-Card Debt: It's Worse Than It Looks." The Wall Street Journal. July 9, 2010. (Oct. 2, 1010)http://online.wsj.com/article/SB10001424052748703609004575355362430020090.html
  • Ellis, David. "Skil the mortgage, pay the credit card." CNN Money April 15, 2010 (Oct. 2, 2010)http://money.cnn.com/2010/04/15/news/companies/consumer_debt_payments/index.htm