Why do people start down the path of debt? We asked this same question to people on our site (who have an average debt of $25k-50k) to see what the number reason was for debt. The number one reason for debt turned out to be changes in income and unemployment.
Coming in at the number one spot, 35% of the people we surveyed said changes in income was the #1 reasons they are in debt.
Unexpected unemployment can cause massive debt. When people aren't generating income, they often end up maxing out their credit cards. Without solid emergency savings, and with cost inflation on gas, food, housing, and other expenses, debt is often the result.
The second most common reason people are in debt may come as no surprise: poor money management. Many don't work with a budget, and this can break one's finances. Before they know it, all of the little, seemingly harmless purchases will add up. Even that daily $5 mocha latte will add up (That's $1,825 a year, just in coffee!).
One of the worst ways to mismanage money is missing a credit card payment. Missing credit payments can increase interest rates. Using the example of missing a payment on a credit card, with a no-interest balance transfer rate, on a $5,000 balance - one can go from 0% interest to 22% interest really quick. That's more than $1,000 in interest every year. (If you're looking to combine credit card payments and potentially get lower interest rates, you might want to check out debt consolidation).
But even just paying the monthly payment can skyrocket interest rates and the overall amount of future monthly payments. In one case study, we learned of a man who was in debt over $25,000 in consumer loans, and not really considering the future effects of his situation. He was just making the bare minimum monthly payment, and before he knew it, his minimum monthly payment grew higher than his mortgage payment.
Tied for third, 14% of people say a change in family status is what lead to their debt. These days, more than half of all marriages end up in divorce. Because divorce causes such a change in finances, it is a huge catalyst of debt. During a divorce, people have to worry about attorney costs and splitting up the finances according to how the judge rules.
Debt can also come with the expenses from a new child. Often, one parent stays home from work to take care of the kids, or they hire a babysitter. According to a USDA's Expenditures On Children By Families' report, it costs, on average, more than $245,000 to raise a child.
For 14% of people, taxes are the biggest reason they have debt. Debtroundup states that with increasing "state, local, and produces taxes," people have less money to spend, and debt is accumulating. Little taxes can and do add up. On top of that, those who freelance or have back taxes often have problems with tax debt.
Emergencies happen. Medical emergencies, can be especially expensive - that's why 10% of people say this is the biggest reason they are in debt.
Most doctors take credit cards for payment. With insurance issues, and policy lapses, bills can add up. According to Lifehack, people who cannot afford their medical bills will now turn to a loan, and put the bill on credit to avoid being turned in to Collections.
Debt is often accumulated slowly, and before people know it, their minimum monthly credit card payments exceed what they can afford. When swiping that small, yet powerful card, it is important to pay attention to the financial impact that will come from each purchase. What is the biggest reason you have debt?