Understanding Debt Series: Part 1 The Causes of Debt

by admin on 2 September 2010

This is part 1 of a three part educational series on debtsecrets.co.uk about Understanding  Personal Debt. These articles are aimed at professionals working  in debt advice or advocacy services.  Part 1 discuses the causes of a personal debt crisis.

The Causes of Consumer Debt Problems:

Consumer Debt is caused by a multiple of factors but the primary ones are low income, health problems and family breakdown.

1. Debt Problems Caused by Sudden Changes in Life’s Circumstances

Consumer debt problems are commonly connected with changes in life’s circumstances. Such changes may be extraordinary events such as illness, relationship or family breakdown, unemployment or reduced working hours (leading to a sudden drop in income) or death of a loved one which results in an unexpected increase in expenditure.

Where debt is not the result of a sudden change in life’s circumstances, two of the most common causes of consumer debt are poverty and/or poor financial planning and management.

2. Poverty as a Cause of Consumer Debt

Poverty as defined by the combat poverty agency is either inadequate income or resources which results in people being marginalized and excluded from participating in activities which are considered the norm for other people in society . It would include the “relative deprivation” which is particularly evident during Christmas. At this time for example many poor people cannot afford to meet expectations of family or friends, their budgets are overstretched and they often end up resorting to money lending services.

The debt problems attributed to poverty can sometimes be merely the symptom of poor health or other severe and persistent social problems such as trans-generational unemployment, poor housing, gambling and drug addictions, alcoholism or substance abuse.

3. Poor financial planning and Societal Factors as a Cause of Consumer Debt

Poor financial planning frequently stems from a poor financial education an issue affecting people of all income levels. Many people do not know how to balance their income versus their spending and even those on relatively high incomes are prone to spending far beyond their means. In addition consumer debt has been fuelled in recent years by the huge amounts of easily available credit that coupled with a consumer culture has resulted in unprecedented levels of indebtedness in society. The level of financial over commitment cannot be blamed on poor financial education alone but also on the irresponsibility of the lending sector.

Some examples from my previous experience of debt problems and their causes will feature in the next article

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