How Can Debt Happen To You?

Drishti Choudhary
April 11, 2024
How Can Debt Happen To You?
How Can Debt Happen To You?

Disclaimer: Penny Calling Penny is an affiliate website. This means that we get a small commission when you click some of the links in this article. Don’t worry – we’ll never recommend anything we wouldn’t use ourselves.

Are you contemplating if debt is the way out of the dark tunnel of messed-up personal finance?

Do you want to safeguard yourself from falling into debt? Our blog is for you! 

You need to understand the mistakes that might get you into debt and those that can keep you in it. 

Before we comprehend the errors that make one fall into the swamp of debt, let us look closer at debt. 

What Is Debt?

In the most straightforward sense, debt means borrowing money from creditors at a specific interest rate for a particular time until repayment. 

You can use debt for big purchases, emergencies, or sometimes when income is below the required level, even to make day-to-day expenses. 

It is essential to utilize and manage debt efficiently so you don’t fall into a debt marsh.

Hence, the borrower gets a certain amount of money to be paid by a specific date. 

The time the borrower has the debt will decide the amount that the borrower has to pay as interest to the creditor. 

So, the sooner you pay your debt, the less interest you pay.  

Debt can be of many types depending on the needs of the borrower. 

The difference in the amount and the purpose of that particular debt makes different types of debt.

1. Mortgage: This is the debt you take for purchasing real estate or property like a home or apartment. The repayment time is usually around 15 to 30 years. 

2. Personal Loan: This is the loan you opt for when you need money for personal or emergency expenses like weddings, moving, etc. 

3. Student Loan: This is the loan you must take to study in college. If you can secure a scholarship, student loans may be reduced. 

4. Credit Card: This is the most widely used kind of debt. You make day-to-day purchases without paying at the same time but rather together, either annually or monthly. 

5. Auto Loan: This is the loan taken to purchase any automobile. This vehicle can be a car for personal use, a truck for your business, etc.

6. Business Loan: This is obtained when opening a new venture or investing more in an old business. You can also take a small business loan for a smaller-scale enterprise.

Secured v/s Unsecured Debt

All the debts mentioned above can be categorized as secured, unsecured, and revolving. 

They get ordered based on whether the borrower provided any collateral against the debt and if they can repeatedly borrow the same amount of debt. 

Secured Debt

This is the type of debt given to the borrower against collateral to the creditor. 

The collateral is usually like a car or property. When taking a car loan, a car becomes the collateral, as is the case with a mortgage for a house. 

The condition remains that if the borrower cannot repay the debt by the declared date, the creditor gets the right to take the collateral if borrower fails to pay for their credit. 

Thus, this is also called collateralized debt.

Unsecured Debt

This is the type of debt given to the borrower without any collateral. 

Thus, the creditor has no security if the borrower defaults on their payment after the declared repayment date. 

The creditor lends the money based on the credit history of the borrower. And because there is no security as opposed to secured debt, the interest rate is higher than that of secured debt. 

Credit cards and personal loans usually come under this category. 

Revolving v/s Installment Debt

Revolving Debt

This type of debt lets the borrower get the same amount again if they pay the previously borrowed amount on time. 

This is typically the case with credit cards. You keep getting the debt when you pay the minimum amount owed monthly. 

This system is called a line of credit. This line continues till the account is active. Thus, it is open-ended. 

Installment Debt

This type of debt lets the borrower get the debt but asks for disciplined monthly payments. The loan is paid in installments. 

Thus, it is close-ended as opposed to revolving debt. 

As you keep paying your loan installments along with the interest charged, the amount you pay each month keeps decreasing. 

Secured debt, like a mortgage, and unsecured debt, like student loans, can come under installment debt.

Good v/s Bad Debt

All the debts taken can also be categorized as Good or Bad debt. debts can’t be termed as good or bad unconditionally. 

If debt helps you reach your goal, it is beneficial to you. 

However, debts can sometimes take a toll on your finances, which are more significant than expected. 

Point Of Difference Good Debt Bad Debt

Interest Rate

Lower interest rate
Higher interest rate

Impact On Worth

Increase your overall net worth.
Negatively impacts your personal finances.

Societal Acceptance

Accepted
Rejected

Used For

Fulfilling life goals
Wasteful expenses

Time For Repayment

More- since it has a low interest rate.
Less- since it has a high-interest rate.

Example

Mortgages, Student Loans, etc.
Payday loans, credit cards, etc.

If a debt you take helps you make your life easier, it also adds value and appreciates with time, this will be termed as good debt. 

Example: Like taking out a mortgage for a new house. It helps you invest, giving you more value of your borrowed money. 

But if a debt you take creates more financial problems for you in the way that the loan amount goes to unnecessary expenditure and depreciates with time, this will be termed as bad debt. 

Example: Using credit cards to pay for a luxurious stay at a hotel. It creates problems because you would have no other use of the money and have to pay high interest for a wasteful expenditure. Thereby causing more mess in your finances.  

How To Avoid Bad Debt?

It is advised that you try to avoid bad debt. And believe us, it is possible. 

It would help if you were financially savvy, and boom, you would have avoided taking bad credit effectively. And we are here to help you in this journey. 

Here are a few tips on how you can avoid bad credit. 

1. Frugal Living

If you intend to avoid bad credit, the best way out is frugal living

You could stop spending on high-end items and save those extra bucks so you don’t have to get a card when you need the money. 

You could live frugally by looking for deals, coupons, discounts, etc. 

You can even adopt reusing and repurposing your possessed items rather than spending money on new ones. 

2. Know Your Bucks

You must always know where each of your penny is going. 

This will help you to manage your finances better and hence avoid taking on debt.  

3. Keep The Debts Limited

Sure, there is a probability that you come across a situation where taking a debt is inevitable. 

But remember, while not taking debt might not be in your hands at that moment, avoiding multiple debts might be. 

Avoid taking useless or unnecessary debts and thus avoid bad debts. 

4. Pay Off On Time

It might seem like a task, but this is the most innovative way. 

If you have already taken a debt, you must stop it from becoming deficient. And that is possible if you pay your installments on time. 

Doing so ensures that the interest rate doesn’t rise above the manageable level and that your debt is still under your control and is not bad.

opportunities and obstacle with debt

Should You Take Debt?

This is a question that crosses every American’s mind at least once. 

Because the cost of living is ever rising, making a living and thriving is becoming increasingly expensive. And what comes to the rescue of a destitute? 

debt. But wait, is taking a debt worth it? Should you take debt? 

The one-word answer to the question is NO. As a borrower you restrict your choices and lose control over your money sooner than you realize. 

The money you could have invested in real estate or saved for retirement now goes for interest payments on your credit cards. 

Even if you can afford payback terms, stay away from debt as far as possible. 

Of course, there are moments when your income isn’t enough to cover even your daily needs. 

That might be a time for you to take on debt. But before you decide on taking out a debt, you can look for government policies, grants, scholarships, etc, to help you in dire times. 

Further, the purchase you will make with your debt will give you better returns in the future, like purchasing real estate. 

The value is bound to increase, so you can proceed with the debt. But again, make sure you take out a debt within your paying limit.  

How Can Debt Happen To You?

Sometimes, as mentioned, avoiding taking out a debt is inevitable. 

But most of the time, mismanaged personal finance is why a rational person gets stuck in the debt bog. 

Some reasons which might slide you off into debt are mentioned.  

(I) Divorce

Getting separated from your partner may drastically reduce household income, pushing you to take on debt. 

(II) Medical Bills

If you or your family member suffer from some disease that costs a lot of money, you would be bound to take on debt to pay off hyper-expensive medical bills.

(III) Student Loans

If you have children or you want to pursue college yourself, considering the hefty college fees, you would be required to opt for a student loan

(IV) Car Or Home Loans

You might want to increase your standard of living and hence take up a car or home loan for the same. 

(V) Job Loss

You may become unemployed due to N number of reasons and hence would want to take a debt to make the ends meet. 

Here are inevitable mistakes that can make debt happen to you; hence, you should avoid them. 

1. Buying Credit Card

You may buy a credit card even if you don’t need to because it’s part of American culture. 

This might make you spend on things that aren’t necessary or are out of pocket for you. 

Avoid buying credit cards for wasteful expenses.

2. Not Having An Emergency Fund

If you do not have an emergency fund as of now. CREATE AN EMERGENCY FUND right now. 

It is in times of emergencies when you might feel the need to take out debt. 

Try to save initially small sums of money and then bigger chunks to help in bad times. 

This will help you prevent going into debt. 

3. Focusing On Wants

You may be a maximalist. And because of your unlimited wants, you would want to take debt to fulfill them. 

But trust us, you do not want that. Stay focused and use your earned income first on needs, and then, if you believe you can afford something, then only buy it. 

Never take a debt for your wants. This will only worsen your finances. 

4. Not Tracking Your Expenses

If you don’t know how your expenses are running, you may fall short of money and take out debt. 

To avoid this, make sure that you create a sheet, especially for your expenses, and know where each of your penny is going. 

This will help, especially if you have multiple accounts, credit cards, and sources of income. 

5. Living Luxuriously

Congratulations on getting that pay raise. But this is not your free pass to spend extravagantly and live luxuriously. 

Continue living the way you were living when you had a lower income. 

This will help you save more for investment or retirement and get you away from debt. 

6. Not Having A Budget

It is the most essential part of your financial management. To budget your earnings up. 

By budgeting, you can reduce wasteful expenses and spend on the necessities. 

This way, all your needs will be fulfilled, and you could save up for emergencies and thus would not be required to take debt. 

You can even use apps like Quicken to budget your finances. 

7. Not Saving Through Coupons

You can use coupons to save money on groceries and other house needs. 

But if you miss out on this, you might be wasting extra bucks. And thus, you will find the need to take out a debt. 

You can use all the saved money through the coupon in an emergency fund or retirement plan

Why Are You Still In Debt?

It is possible that you already have one or multiple debts. And you are paying your installments along with the interest rate but are still stuck in the debt swamp. 

Don’t you know why you are still in debt? Here, we find the cause of your debt disease, and next, we provide medicine for it. 

Here are a few reasons why you still might be in debt.

(A) Money Management

You may have poor money management skills. It is simple. 

Just prioritize your needs before you even look towards spending money on wants. 

Manage your money so that you save on the first of every month. 

Bad money management can make you stay in debt forever. 

You can even use budgeting apps like PocketSmith for better money management. 

(B) Emergencies

An emergency doesn’t come after an invitation. Financial or medical emergencies can arrive at any time. 

Hence, you might be unable to pay off debt for quite some time or pay less. 

And thus, this could be one of the reasons why you are still in debt.

Make an emergency fund to avoid diverging your debt installments to emergencies.

(C) Gambling

If you are into gambling, it would be difficult for you to pay off your debt quickly. 

Gambling takes in more money than it gives and, hence, could be one of the reasons why you are still in debt. 

(D) Got Scammed

You may have been scammed since cyber scamming is on a roll. 

You might have been asked to pay a certain amount as fees on the guarantee to let go of earlier funds. 

This could cost you more and let you stay in the debt loop for a long time. 

Check for the credibility of such sources before making any payments.  

(E) Using Credit Cards For Cash Advances

If you habitually use credit cards to make cash advances, you will stay in debt. 

You will be paying a higher APR and a fee than everyday purchases, making it difficult to come out of debt. 

Stop this practice as soon as possible to defeat the debt bog. 

(F) Having Too Many Credit Cards

This practice is equally dangerous. If you have multiple credit cards, you will have a lot of interest. 

Along with regular payments, the interest rate could make it challenging to keep track, eventually pushing you deeper into debt and making you stay there.

(G) Missing Payments

Sometimes, you might be missing on your debt payments or making just the minimum payments to avoid penalties, and hence, your debt amount stays as high, and the interest levied is also a lot. 

Therefore, you keep waiting in debt. 

(H) Multiple Debts

You might be paying off one debt with another debt. 

This practice is dangerous since you would never be debt-free. 

You would be taking more debts to pay off more debts and hence stuck in the loop. 

How To Pay Off Debt?

By now, it must be clear why you are in debt, if you are. 

But what is more important is to know how to pay off the debt because you can be truly free when you are debt-free. 

It might seem very long and tiring, but it is possible. 

It would help if you had a plan and strategy to pay regularly so that interest on your debt continues to decline and you are debt-free as early as possible.

Best Websites To Consolidate Your Debts

Before we jump to the methods to pay off debt ultimately, here are a few ways to handle different types of debt. 

Secured And Unsecured Debt

  • Make sure you pay the loan installments on time. Keep up with the minimum monthly payments, and spend more than the minimum amount to get rid of the loan at the earliest. 
  • You can talk to your lenders if you cannot make the payment any month. The lender may agree to reduce your loan or give you more time to pay. 
  • Sell your possessions. If you have a car or any other real estate you own, sell it and pay for your debt. This might seem extreme, but desperate times call for desperate solutions. 

Revolving And Installment Debt

  • Be careful about the amount you spend when you have revolving debt like credit cards. When you spend less, you will borrow less and have less debt to pay for. 
  • Always make your payments on time, and the costs must be total. Paying on time or before the due date will help you manage debts better. 
  • Try to make payments for the debt every week rather than every month. This way, you will pay more than the minimum amount every month, and hence, you will pay off debt much earlier. And the amount that you pay in interest will go down. 
  • If you are uncomfortable paying weekly, you can make one extra payment yearly and slowly reduce your interest and debt. 
  • You can refinance your loan. If you believe you are getting a lower interest rate and can reduce the loan length, refinancing could work for you.

They are coming to the central aspect of paying off debt

Best Ways To Pay Off Your Debt

Here are a few ways to help you pay off your debt quickly and early.

1. Know Your Debt

It would help if you become aware of the amount that you have in debt. 

This has to be the first step in your debt payoff journey. 

You must compile all your debts, their amounts, interest rates, and how much you have paid to the date everything is in place. 

When you know your debt, you can fight it better. And eventually, win against it.

2. Paying First

After you become aware of the amount in debt, you can easily recognize which debt needs to be paid first. 

You can start with the smallest debt so that paying it off quickly stops its interest. 

Or pay for the most significant debt instead to make paying more interest go away prior and then move on to smaller debts.  

3. Schedule Your Payments

No matter which debt you pay first or how much you devote to each debt. It is essential to schedule your payments. 

So that you don’t miss any payment or deadline for the same, this will help you minimize late fees or penalties. 

Various tools are available online to help you schedule and automate your payments for debt installments. 

4. Have A Budget

We can not stress enough the need for a budget if you are serious about paying your debt off. 

This is important because you can track your spending and know where to make cuts to pay more in monthly debt installments. 

By making a budget, you can also save more. 

You can save for retirement or any big purchase and wouldn’t have to take another debt. 

You can even use budgeting apps like Bill Trim to help you budget better. 

5. Cutting Out The Extra

Not only will creating a budget help pay off debt early, but it will help you organize your finances better. 

It allows you to cut down on unnecessary expenses, like unsubscribing to the channel no one in your house watches. 

Or you can decide to eat less in restaurants and prepare food at home. 

6. The Transport

If you have a car loan for a luxurious car, consider trading it for a smaller car. 

If you already own a car, you want to sell it, buy a smaller or cheaper vehicle, and use the money to pay off your debt. 

You can also finance a used car at a much lower amount, thus contributing more to the debt payments. 

7. Use The Cash

Since payments have been made digitally, more people have started losing money quickly. 

Take out cash from your bank account and promise not to use more money that month than you have in cash. 

Not only will you be spending less, but you will also feel the money going away, limiting your spending. 

This will also make you use credit cards less and eventually reduce your revolving debt. 

8. Curb Credit Card Use

To get rid of debt, you must stop using credit cards now. This will prevent you from falling any deeper into debt. 

You will see your finances better managed and debt paid off earlier and more efficiently.  

9. Credit Counselor

You can manage your debts better with the help of a credit counselor if you feel you can’t do this alone. 

They can help you set up a debt management plan and hence assist in paying off your debt as quickly as possible. 

With their debt management plans, they can even help by negotiating with your creditors and getting your debts to a lower amount or getting you more time to pay back. 

10. Debt Payoff Method

Several debt payoff strategies and methods can make paying off debt easier. 

There are methods like debt avalanche (you repay debts with the highest interest rate before others) and debt snowball (you repay debt with the smallest balance before others), among other strategies, which can help you pay off debt as soon as possible.

Conclusion

As conscious you are while taking out debt about the type and use of debt, the more you are safeguarding your future.

An appropriate amount of good debt can help you build a more financially secure future, but one lousy debt would be enough to ruin even your present. 

Make the right decision. And the right decision sometimes can be not taking a debt. 

Are you worried if your debt knowledge is enough to help you stay out of it? 

Our blog is the detailed sign you need to keep your finances healthy! Check it out now! 

FAQs

Often, mismanaged personal finance is the reason for a rational person to get stuck in the debt bog.

If a debt you take creates more financial problems for you in the way that the loan amount goes to unnecessary expenditure and depreciates with time, then it is a bad debt.

When you borrow money from a lender, it is termed a Loan. When you owe money to the lender you borrowed, it is termed a debt.

Suppose you live in a rental place. And now you wish to buy your own house. You have some savings but still need financial assistance to get your chosen home. You will be taking a mortgage and repaying it after a certain period, along with interest on the amount every month. This is debt until you repay the entire amount.

About

Your Financial Success Starts Here

pcp-sb-2

Actionable Tips and Freebies Delivered Straight to Your Inbox! Subscribe Now!

(By subscribing, you agree to our terms & conditions, privacy policy, and disclaimer.)

You May Also Like

Was this article helpful? We'd love to hear from you!

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments
search-leftline

SEARCH

search-leftline
save 10000 in 26 weeks printable

Are you up for the challenge of saving $10,000 in 26 weeks?

save 10000 in 26 weeks printable

Are you up for the challenge of saving $10,000 in 26 weeks?

This printable tracker will guide you week by week to reach your goal of saving $10,000. Whether you’re planning a big purchase or building an emergency fund, this tracker will keep you on the right path.

(By subscribing, you agree to our terms & conditions, privacy policy, and disclaimer.)

check your email

Woohoo!

Your Printable is en route!

Check your promotion, junk, and spam folders: Sometimes, our emails can end up in unexpected folders.

Thanks

Team Penny Calling Penny!

(By subscribing, you agree to our terms & conditions, privacy policy, and disclaimer.)