Why We Are In Debt

Nearly all of us are seduced into overspending at some point. You owe it to yourself to understand why you are in debt—and how to break the cycle.

Photo by Mikey Burton

We all have debt—from the big, unavoidable expenses, such as college loans and mortgages, to the small, like a credit-card balance you racked up by charging an unexpected car repair or the holiday gifts that cost more than you could really afford.

As the January 2012 issue went to press, Americans owed more than $8.5 trillion in home-mortgage loans, nearly $1 trillion in student loans, and $789.6 billion in credit-card debt. That translates into a median household debt of more than $200,000, according to the U.S. Federal Reserve. Although our debt load has actually decreased a little since the recession began in 2007 (partly because spending is down), recent stats show that hefty loans continue to wreak havoc on our finances.

The U.S. Department of Education reports that nearly one in 10 borrowers who started repaying student loans between October 2008 and September 2009 defaulted by October 2010—the highest rate in 14 years. And mortgage lenders filed foreclosure procedures on a record 2.8 million properties in 2010 (a 23 percent increase from 2008), according to RealtyTrac, an aggregator of foreclosure data. So it’s little surprise then that personal-bankruptcy filings jumped by 9 percent in 2010.

All this debt hurts more than just our wallets; it can also damage our health and our relationships. A recent poll by the nonprofit National Foundation for Credit Counseling (NFCC) found that 24 percent of people said financial anxiety had an adverse effect on their health, and 27 percent said it had a negative effect on their marriage.

If you’re weighed down by all this debt, what’s the key to reducing it? Knowing how you got into it in the first place.