PERSONAL DEBT

Personal Debt

Personal Debt

Introduction

Debt becomes a problem when it can no longer be effectively serviced and it begins to get out of control. However, recent research suggests that the point at which debt becomes a problem can be quantified and that borrowers have two thresholds when it comes to worrying about debt.

Discussion

One of the biggest misconceptions with being able to manage a debt load is not the amount of debt one has - it's his ability to be able to repay it. In theory, someone making $10,000 per month with $40,000 of debt could be in a more secure financial position than someone who makes $1,000 per month with $10,000 debt.

Causes of being in too much debt

Having more than 1 or 2 credit cards

Having more than 1 or 2 credit cards is probably unnecessary. Having just one makes it easier to track and control one's spending. One should not be tempted into 'points' cards or low introductory rates because he willll usually find himself paying way higher interest rates in the long run. A credit card must be used as a substitute for carrying cash and not a substitute for borrowing (Katy, 2007).

Having no savings

Having no emergency funds or savings of any kind is a sure sign one may be in trouble. 30-40 years ago, most people did not feel the need for credit because they had savings to cover unexpected expenses or treats. Now, most people do not save because they 'have access to credit'.

Using credit or borrowings to cover regular living expenses

This is a sign of the case when a person is probably spending more money each month than he brings in. This cycle is a recipe for disaster as obviously it cannot continue. The fastest way to resolve this issue is to either bring in ...