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The Debt Cycle and Why People Get Into Debt

By Paul Murphy

Have you ever wondered how and why people get into debt? And what really triggers the financial challenges we have all faced? We know that debt can lead to disastrous consequences; it can destroy relationships, cause you to lose your assets, and bring on unparalleled mental strain.

So why would anyone take the chance and get into debt? The truth is…there are many reasons people take on debt, some within our control, and some outside our control. Some are choices we make and others are driven by circumstance.

It is important to understand how we can become consumed by debt. That’s how we can recognize the warning signs and attempt to avoid entering the debt cycle.

To understand debt, it is important to understand the debt cycle.

What is the Debt Cycle and How Does it Start?

The debt cycle starts when we start to live beyond our means and spending becomes greater than net income. This can happen for a number of reasons, from ignorance to absolute necessity.

Anytime expenses are greater than net income, it means we must borrow to maintain our current lifestyle (usually through credit cards).

This is fueled by the ease in which credit is available to us. The financial industry makes using credit as convenient as possible for every day expenses. It starts by adding small purchases to existing credit cards to get through to the next pay day, always with the intention this will be paid off as soon as the next pay day arrives. The fixed or non-discretionary expenses we have cannot be easily changed, so the only way to make the required payment to the new debt is to change our lifestyle. It is important to remember our non-discretionary expenses are also driven by life style and choice, the area we live, the house we live in, the cars we drive, etc.

How to Know You’re in the Debt Cycle

Once in the debt cycle, we soon find that the plan to pay off the small debt we incurred is not achievable. Before we know it, we have borrowed to the available limit on the first credit card.

We obtain another credit card to bypass this limit. This is often spurred by the 0% interest balance transfer with the mindset that the debt will be paid down much faster at 0% interest. What we don’t always realize is the 0% interest ONLY APPLIES to the balance transferred.

Any new credit card usage will incur the standard credit card rate and any funds deposited to the card go against the new purchases, not the balance transfer. The introductory 0% rate period will quickly pass, with no progress made to pay down the debt.

Now the full interest is being charged on the existing balance, as well as the new debt. Instead of one credit card, we now have two or more. The spending continues, digging ourselves deeper and deeper into debt each month. The debt cycle continues with limited opportunity to escape.

Once we enter the debt cycle, it is very difficult to get out. Getting out of the debt cycle requires a life changing event such as a financial windfall or a significant change in lifestyle.

How Do People Get Into Debt?

There are many reasons why people accumulate debt…

  • Poor money management
    It can be hard to understand interest and how it truly affects your ability to pay off debt. Inadequate budgeting leads to growing debt. Without a proper budget, you cannot track your expenses. If you write down everything you are spending for an entire month, you can see exactly where your money ends up. You can also see where changes can  be made. This is the best way to learn where you can cut unnecessary expenses and avoid debt.
  • Compulsiveness
    Some people lack the self-control and discipline with their spending. Others may not want to control their spending, but the time will come when we will all be held accountable for our spending and the choices we have made.
  • Pride
    People worry more and more about the social circles they move in and how they are perceived by their neighbors, friends and family and this can drive how we spend money and incur debt to maintain a false perception of their financial situation.
  • Necessity
    People go into debt in order to simply survive and provide the basic needs of food and shelter for their family. Necessity is rarely the only reason people go into debt and this usually precedes one or a combination of the other factors listed.
  • Reduced Income
    This can immediately lead to expenses exceeding income. The danger is when it is viewed as a short term set back and normality will quickly return and no lifestyle changes are made (often driven by pride). Immediate action is needed to make sure that you understand what your change in income means so you can create a budget and plan to allow for this. Hopefully the reduced income is temporary and the changes in lifestyle and spending is managed early without using credit to subsidize a lifestyle during this period as it can become extremely dangerous.
  • Divorce
    More than half of Canadian marriages end up in divorce and this can be driven by or create immense strain on personal finances.
  • Gambling
    Is an increasing form of entertainment and with the evolution of online gaming it is becoming more prevalent and easily funded through credit cards. It becomes easily addictive with the idea of “The big win” or the mentality I will just win back what I lost, and then I will stop.
  • Limited Savings
    To avoid unwanted debt we need to be prepared for emergency expenses. If you have sufficient savings you are not reliant on easy to access, short term, and high interest credit to meet the unexpected bills. This also creates a comfort zone for severe illness, job-loss, divorce or other life altering events without incurring debt.

Any of the above scenarios make it very easy and also common for us to incur debt. However, if you develop good money management and budgeting skills before any of these events take place it will make it much easier to deal with them, and ultimately avoid them in the future. Any time we spend outside of our means it will reduce wealth, and put us at financial risk. By taking the necessary steps toward financial responsibility you will greatly reduce the probability of entering the debt cycle.


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