What's the No. 1 reason people go into debt?

Impersonal Financials

As much as it helps to see financial institutions as the bullies behind our debt woes, there is two-part accountability in debt creation. We have to take personal control for our own spending, but the lenders also have a form of impersonal control that can help or hinder us.

In the simplest terms, most worldwide economies need consumers to spend money for the health of the economy, and banks and other lenders facilitate that spending. Individuals with good credit histories can borrow at lower interest rates because they are less of a risk for defaulting. Those with bad credit will get loans at considerably higher interest rates. They get a bigger hole of debt and have an increasingly smaller shovel of resources for filling it up. But having good credit can be a detriment. If a lender sees you as a low risk borrower because you have good credit, you could be more of a target for low-interest offers on lines of credit.

Why? Because according to a 2009 U.S. Census Report "the number of people in poverty in 2009 is the largest number in the 51 years for which poverty estimates are available" [source: U.S. Census Bureau].That means many of the 43.6 million people in poverty owe lenders and can't pay them. Financial institutions need to offset the losses, and they're watching and marketing to those customers that can.

Regulations have been put in place to make lenders more accountable to bad lending practices. The Truth and Lending protections of the Federal Reserve in the United States and similar consumer credit legislation in Europe and Japan now require creditors to state all fee and interest terms, and they must notify consumers in advance of any increases. Some of these laws even place limits on the interest financers can charge. Marketing for loans still creates spending, and credit cards are still looking good with fine-printed terms to confuse the simpler reality of what they are, but full disclosures are there. Buyers just need to read them.

Creditors are, after all, for-profit businesses. Helping borrowers stay out of debt is not the business of lenders who earn from our debt. While banks and financing play a large, and often healthy, role in economies, if a person's finances are debt-heavy, doing whatever it takes to get out of debt requires discipline and creativity in small partnership with the money lenders.

Ready to bank some knowledge on how to get out of debt? See the next page for budget resources and calculators.

Related HowStuffWorks Articles

More Great Links


  • Donmoyer, Ryan J. "Some 3,000 Millionaires Claim Jobless Benefits, IRS Data Show." Bloomberg. Oct. 1, 2010. (Oct. 4, 2010)http://www.bloomberg.com/news/2010-10-01/almost-3-000-millionaires-claimed-jobless-benefits-in-2008-irs-data-show.html
  • Federal Reserve Board. "Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances." Feb. 2009. (Oct. 1, 2010)www.federalreserve.gov/pubs/bulletin/2009/pdf/scf09.pdf
  • Federal Reserve Board. "Credit Card Repayment Calculator." April 21, 2009. (Sept. 30, 2010) http://www.federalreserve.gov/creditcardcalculator/
  • Federal Reserve Board. "Federal Reserve Statistical Release G19: Consumer Credit." Sept. 8, 2010. (Sept. 30, 2010) http://www.federalreserve.gov/releases/g19/Current/
  • Federal Reserve Board. "What Your Credit Card Company Has to Tell You." Mar. 11, 2010. (Sept. 30, 2010) http://www.federalreserve.gov/consumerinfo/wyntk_creditcardrules.htm
  • Federal Trade Commission. "Knee Deep in Debt, Facts for Consumers." Dec. 2005. (Sept. 30, 2010) http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm
  • Jones, Daryl G. "Personal Savings Rate Worse than We Thought." Fortune Magazine. June 30, 2010. (Oct. 1, 2010) http://money.cnn.com/2010/06/30/news/economy/personal_savings_decline.fortune/index.htm
  • Kawamoto, Shingo and Flynn, Finbarr. "Japan Minister Jimi Opposes Osaka's Plan to Loosen Consumer Lending Rules." Bloomberg.com. July 6, 2010. (Oct. 1, 2010) http://www.bloomberg.com/news/2010-07-06/financial-services-minister-jimi-against-osaka-consumer-lending-zone-plan.html
  • Khan, Kim. "The Basics: How Does Your Debt Compare?" MSN Money. 2010. (Sept. 30, 2010) http://moneycentral.msn.com/content/savinganddebt/p70581.asp
  • MSN Money. "How Much Debt Is Too Much?" 2010. (Sept. 30, 2010) http://moneycentral.msn.com/personal-finance/calculators/evaluate_your_debt_calculator/home.aspx
  • Peachey, Kevin. "Loans: Why Loyalty Matters to Banks." BBC News. Sept. 12, 2010. (Oct. 1, 2010) http://www.bbc.co.uk/news/business-11236525
  • Simon, Ruth. "Credit Card Rates Climb: Levels Hit Nine-Year High as New Rules Limiting Penalty Fees Help Fuel Rise." The Wall Street Journal. Aug. 23, 2010. (Oct. 1, 2010)http://online.wsj.com/article/SB10001424052748704094704575443402132987676.html
  • Trumbull, Gunnar. "Consumer Protection in French and British Credit Markets." Joint Center for Housing Studies, Harvard University. Feb. 2008 (Oct. 4, 2010) www.jchs.harvard.edu/...consumer_credit/.../ucc08-17_trumbull.pdf
  • U.S. Census Bureau. "Income, Poverty and Health Insurance Coverage in the United States 2009." Sept. 16, 2010. (Oct. 4, 2010) http://www.census.gov/newsroom/releases/archives/income_wealth/cb10-144.html
  • U.S. Department of Commerce, Bureau of Economic Analysis. "Personal Saving Rate." Oct. 1, 2010. (Oct. 4, 2010) http://research.stlouisfed.org/fred2/data/PSAVERT.txt