Do you feel as if you'll be in debt forever? You're not alone. According to a survey commissioned by CreditCards.com, 13% of Americans say they'll never pay off all their loans, and another 8% say they won't pay off what they owe until they're at least 71 years old. That's a discouragingly large number of people who consider themselves stuck in debt with no way out.
If you're in this situation, step back, set aside the despair and ask yourself how you got here in the first place. Here are 10 common reasons people fall deep into debt and can't get out of it. Identify the reasons that apply to you, then formulate a plan using our effective strategies to conquer the root causes of your debt.
You Don't Know How Much You Owe
Start by making a list of your debts and choosing one debt to pay off first--preferably the one with the highest interest rate. See Why Your Credit Card Debt Won't Die for more on why this approach works. Find room in your budget to boost your monthly debt payments by eliminating unnecessary expenses. If you need help creating a debt-payoff plan, you can use a free service such as ReadyForZero.
You Pay Only the Minimum
Making minimum payments each month is a guaranteed way to be stuck in debt much longer than necessary. For example, if you have a
Simply by boosting your monthly payment to 3% of the balance rather than 2%, you can cut that payoff time almost in half. If you really buckle down and increase your monthly payment to 5% of the balance, you'll wipe out your debt in eight years and pay about
Your Mortgage Is Too Big
A mortgage can turn into an albatross around the neck for many Americans. On average, these home loans make up 69% of total household debt, according to the
If your goal is to become mortgage-free as fast as possible, and you have the financial flexibility, there are a couple of options. Assuming you have a typical 30-year mortgage, you could increase the amount of your monthly payment, which will help you retire your loan early and save on interest. By paying an extra
You Took Out Too Many Student Loans
According to the
If you have federal student loans, there are repayment options that can make monthly payments more manageable. However, some of these plans can extend the life of your loan. To pay off student debt quickly, consider getting a side job to earn extra money, as
You Can't Say No to Your Kids
It's important to let your children know from an early age what does--and does not--fit into your budget, advises
You Don't Have Money for Emergencies
A major health expense, surprise home repair or sudden job loss could deal a blow to anyone's finances. Yet, only 38% of those recently surveyed by Bankrate.com would have enough cash on hand to cover such emergencies. Twenty-eight percent of those polled would ask a family member or friend for the money or foot the bill with a credit card. Either way, you could end up drowning in debt if you have to borrow cash every time an unforeseen expense surfaces.
A rule of thumb you often hear is to set aside enough cash to cover six months' worth of expenses. However, you don't have to do it all at once. You can use a free service such as Digit to analyze your income and spending habits to determine how much you can afford to contribute to an emergency fund. With Digit, you connect your bank account to the online service, and small amounts of money are automatically transferred from your checking account to a savings account. (Read more about apps and services that make it easy to save.)
You Feel a Sense of Entitlement
People often fall into the trap of buying things because they think they deserve to be rewarded for small accomplishments or are entitled to what their friends have, even if they can't afford it, says Rose, the Good Financial Cents blogger. They get into the habit of putting those purchases on credit cards, all the while convincing themselves they'll be able to pay off what they owe later, he says. As Kiplinger Editor-in-Chief, Knight Kiplinger writes in The Invisible Rich, "that discretionary spending--the chic apartment, frequent travel and restaurant meals, consumer electronics, fancy clothes and cars--crowds out the saving that will enable you to be rich someday."
It's OK to reward yourself from time to time when you achieve a significant goal, such as losing weight or landing a new client. Just pay cash for it, Rose says. Use our budgeting worksheet to figure out how much money you can spare to buy things you want after covering your necessary expenses. Then set aside a little each month in an interest-bearing savings account to fund those purchases.
Your Car Loan Is Too Long
You might think a longer-term car loan will make a vehicle purchase easier on your budget. But you're probably not saving yourself any money by opting for a loan with a term that's longer than the standard five years. When we recently spoke with
Plus, given that the average trade-in age for a car is six years, you would still owe money on your vehicle at that point if the term of your loan is longer than 72 months. You could roll the balance of your old loan into a new loan if you trade in your car for another one, but you'd be increasing the loan amount, in all likelihood increasing your monthly payment and prolonging the life of your debt. And, of course, the resale value of your car declines the longer you own it. See our tips for avoiding the long-term loan trap.
You Rack Up Late Fees
Those fees you're hit with every time you're late making a payment might seem like small change. But some can be quite hefty, and they can add up quickly. For example, late-payment penalties for credit cards can climb as high as
If you have trouble making payments on time, set up automatic payments through your bank's bill-pay service. That way you won't have to remember to write a paper check and put a stamp on an envelope several times a month. Or, use a free mobile app such as Mint Bills to manage all of your bills in one place and get reminders when they are due so you aren't hit with late fees.
Your Interest Rates Are Too High
The higher your interest rates, the more you'll have to pay to wipe out your debt--and possibly the more time it will take. Say you have a
You could take advantage of 0% or low-rate balance transfer offers from card issuers if you have good credit. But you'll need to transfer the balance yet again to another card (and perhaps several times) if you can't pay off all of your debt during the low-rate promotional period. A better option can be consolidating your high-interest debt into a lower-rate personal loan, says Ebrahimi, of ReadyForZero. You can compare personal loan offers at sites such as ReadyForZero.com and MagnifyMoney.com, or check with your local bank branch.
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Cameron Huddleston is an editor at Kiplinger.