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How Debt Works: The Different Phases of Indebtedness

The different phases of indebtedness

In the 21st Century, being in debt is almost a given, especially if you are young and fresh out of college. Often, it being in debt can feel suffocating, and college students often get into a situation that they feel is inescapable. Nowadays, some people even wonder if they will ever be free of debt at any point in their lives. While it may take concentrated efforts, it is possible to get rid of debt, and people who focus on their financial education can get back to controlling their debt. Below you will see a quick guide about what to do when you are in debt and how to start paying it off. 

First, though, let's understand debt a bit better and check how it begins.

How Does the Debt Cycle Start

Being in debt is very common for numerous reasons, but we are also frequently conditioned to be in debt, as nowadays being in debt is more socially acceptable than ever. Banks even send you credit cards by mail without even asking if you actually want them. If you can't afford it, just use one of your 5 credit cards. Even though you probably won't have any personal debts before you turn 18, everyday you see people using their credit cards to buy literally anything. You see it in movies, and you will most likely see your parents doing the same. This way, it is straightforward for anyone to assume that using credit cards is as natural as breathing, and so is being indebted constantly.

This does not imply that all debt is bad. There are some times when borrowing money is actually a good thing, such as when you need a new computer to work, or you want to start a new business and need some initial loan to finance your first steps. This is all very helpful, as long as it is helping you earn more money or save more time. The real issue is when we get encouraged to accumulate debts for 'investments' that don't really make sense, such as buying an expensive car in order to get validation from colleagues. Another very common example is getting a mortgage because you expect house prices to always keep going up (without actually analyzing the situation)

Student Loans: The Start of a Life of Debts

If you are reading this from the US, you are probably well aware of the ongoing situation with student loans. Often those without a rich family, or who couldn't receive a scholarship, get a large student loan to finance their education because having a university degree is considered a basic requirement for high-paying jobs. Don't get me wrong: having a higher education is a great idea. However, when the cost is that high, you might start wondering whether you are actually going to get a return on your investment or you are just getting yourself in a debt trap.

In addition to that, banks frequently offer students very 'generous' conditions to repay their debts so that they finish their degrees, but all that generosity certainly does not come free. And since your debts seem far away, why not get your very own credit card and start paying for everything with it, right? 

And the Debts Continue to Grow

When you finish your degree, assuming that the career you chose is in demand, you will likely find a job with a salary good enough to keep you afloat. But by then you already got used to your credit card, and you just got through a very long challenge, so you want to be rewarded for your effort, right? 

This is the perfect time to use your credit card even more, by buying things you can't really afford, in order to reward yourself. And the new salary means you can get even bigger credits approved by your bank. So what do you do? You buy a new car, start going out and spending money on restaurants that seemed to expensive when you were a student. All this has a cost, but you don't really have to think about it because you are using your credit card to pay for all that. And if you keep paying the minimum on your credit card, your bank will keep increasing your credit limit. 

When you realize it, you are using most of your salary to pay your credit card expenses. Since even your mom and dad used to do the same, and your friends are likely going through the exactly same situation, you don't mind. Your friends are also getting mortgages, which means you are supposed to get a mortgage too, and buy a bigger house to show your friends you have money. 

    As you keep faithfully paying your debts, your credit rating gets even better, and you can borrow more money. This will be really useful to pay for your marriage ceremony, party, and honeymoon trip because your friends are doing the same thing, and you want to impress them. It's not that a big deal that you are spending so much money, since you get cashback for almost everything anyway, right? 

    And then you finally realize that all these debts are eating up all your income and if you get fired tomorrow, your whole world crumbles because you will have no way to keep repaying them.  And since you can't really use your money for anything apart from repaying debts, you are now forced to keep using your credit card for basically every purchase. Unfortunately, this only increases the amount of money you'll have to pay back to your bank.

That is when you realize you are genuinely trapped in a financial hamster wheel. 

Becoming Debt-Free

If this situation sounds familiar, it is not surprising, as this is how most people in America and Europe live nowadays. The good news is that there is a way out. This article explains how to get rid of debt and begin life anew, free from the consumerist trap.

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