Causes of Consumer debt: Explained

In the previous article i summarized the causes of consumer debt and illustrated them in a fishbone diagram. I also argued that the increase in oil prices would cause an increase in prices of basic necessities in life.

The following is a relevant literature review:

• T. Pettinger writes in his blog entitled “What causes an increase in consumer debt, ”:
  
  1. Lower Real interest rates. Low interest rates mean that loans are more attractive; therefore, it encourages a variety of borrowing, such as credit cards and loans.
  
  2. Confidence. Consumer confidence is important for encouraging people to borrow against the expectations of future earnings.
  
  3. Economic Growth. Higher economic growth tends to increase consumer confidence. When incomes are rising, people expect them to keep rising
  
  4. Supply of Finance. Greater supply of loans and credit cards. Banks more willing to lend to people with bad credit histories.
  

• Steve Bucci of Bankrate.com 2 enumerated top 10 causes of debt and I quote:
  

1. Reduced income/same expenses. Too often we delay bringing expenses in line with a reduction in income for a host of good reasons and let debt fill the gap. The sooner you 2. Divorce. More than half of us do it, some more than once. I can think of few things more expensive and likely to put you in debt. For those of you who have never done it and would like to get some idea of the impact, sell all your assets and get the money in $50 bills. Go to a hotel on a busy street, and you and your spouse open two windows and see who can throw the most money out the fastest. It can be breathtaking.

2. Poor money management. A monthly spending plan is essential. Without one you have no idea where your money is going. You may be spending hundreds of dollars unnecessarily each month and end up having to charge purchases on which you should have spent that money. Planning is no more difficult than writing down your expenses and income and reconciling the two. You will be surprised at how powerful you'll feel when you are making thoughtful decisions about where and when to spend your money.

3. Underemployment. A close cousin to No. 1, people who experience under employment may continue to think of it as only temporary or if they are coming off unemployment feel a false sense of relief. Yes, you deserve a break, but this is not the time. Get those expenses in line with your current income. Down the road if you increase your income due to more hours, a second job, or a better job, then is the time to start adding in some of the previous spending before you became underemployed.

5. Gambling. Call it America's new entertainment or (considering the boom in tribal casinos) the Indian's revenge. Either way there is a guaranteed exchange of money from you to "the house." It can be addictive, hard to stop and loans are freely available.

6. Medical expenses. Gaps in coverage, lapsed policies and increasingly costly alternatives make this a popular category. Just about every doctor I know now takes credit cards. If you think it's for convenience, think again. The medical industry wants to get paid at the time service is rendered. They know that if they don't, the chances of their getting paid drops. This means more debt for you, less for them. To be fair, they are not in the lending business, but this only masks a bigger problem

7. Saving too little or not at all. The simplest way to avoid unwanted debt is to prepare for unexpected expenditures by saving three to six months of living expenses. With a savings cushion in place, a job layoff, illness or divorce will not cause immediate financial strain and increase debt. You always hear, "Pay yourself first." Do it and it will grow and be there when you need it. No one has ever regretted having a savings cushion.

8. No money communication skills. It is important to communicate with your spouse or significant other and your children about finances. Keep the lines of communication open and discuss financial goals and spending styles. If you are married to a spender and you are a saver, you will want to map out a strategy for you both to get what you want. Know what credit accounts you each have and promise each other to be honest about what each other spends. Many people find out that their spouses have racked up thousands of dollars in credit card debt and they had no idea that the accounts even existed. This often leads to number 2 above.

9. Banking on a windfall. Spending tomorrow's money today is very tempting. Especially if you believe that tomorrow will come no matter what. A planned job bonus may not be a sure thing. The inheritance that you believe will come your way may not. The lesson is don't spend the money until the check clears.

10. Financial illiteracy. Many people don't understand how money works and grows, how to save and invest for a rainy day, or even why they should balance their checkbook. The schools don't teach it, your parents may not have sat you down and explained it. It doesn't matter. You are responsible for your life and your money anyway. Financial mistakes are increasingly expensive and complicated to resolve. Get educated and get in control.

• Paul Willis from Guardian Unlimited argued that uncertainties causes sharp rise in the cost of personal loans. “A host of lenders”, he said, “have raised their interest rates on personal loans, some by as much as four percentage points, as growing uncertainty in the fnancial markets takes its toll.

• Kirstin Downey of Washington Post pointed out, when asked why are Americans so deeply in debt, “Its not because they are using credit cards to buy plasma TVs, and premium coffe drinks at Starbucks. The real culprits, according to a new analysis, are the rising costs of housing, health care and education.”