What are the Main Causes of Personal Debt?

Gambling Debts, Money Management, Getting Divorced, Medical Expenses

Apr 5, 2009 Asa Ghaffar

Personal debt damages family life. Poor money management skills, gambling debt, medical expenses and getting divorced can cause long term financial difficulties.

A recent report from the Consumer Credit Counselling Service (CCCS) showed that fewer clients were in a position to repay their debts via a debt solution. In 2008, 35 per cent of clients were able to commit to a Debt Management Plan (DMP) compared with 42 per cent in 2007 and 46 per cent in 2006. Given that the minimum payment into a DMP is just £100, this shows how bad personal debt problems have become.

Poor Money Management and Personal Debt Problems

Families slowly accumulate personal debt over time on credit cards, personal loans and overdrafts. Household income fails to satisfy the unlimited wants of consumers meaning that credit card debt accumulates. The high APR on credit card debt and personal overdrafts leaves less money available the month after. Money management problems can be prevented through effective budgeting, avoiding impulse purchases and going without non-essential purchases.

Gambling Debts and Financial Difficulties

Gamcare's annual report showed that it had a record 37,806 calls in relation to gambling debts in 2008. This represents an increase of 25 per cent compared to 2006 when the Labour government relaxed the gambling laws. Almost half of those with gambling debts accrued them at high street betting shops. Individuals accumulating personal debt as a result of a gambling addiction should seek advice from Gamcare or Gamblers Anonymous. It is never too late to overcome financial difficulties, but the addiction needs to be tackled before personal debt problems can be overcome.

Getting Divorced Leaves a Hole in Household Income

Getting divorced is not only difficult emotionally, it is also a leading reason for the accrual of personal debt. It reduces household income, incurs legal fees and increases outgoings. Those with children are also likely to have to find money for child support. In 2003 Norwich Union revealed that more than £2 billion is spent on the process of getting divorced in the first 12 months alone. The average cost of getting divorced through the courts is £13,000.

Medical Expenses and Personal Debt

Whilst UK citizens may criticise the National Health Service (NHS), medical expenses are one of the leading reasons for personal debt in the United States. Research by commonwealthfund.org showed that the number of people accumulating personal debt as a result of medical expenses has grown alarmingly. Medical debt grew from 34 per cent to 41 per cent, the equivalent of 72 million people, between 2005 and 2007. Of these, 21 million Americans reported that they had accrued substantial levels of high APR credit card debt.

Citizens Advice Bureau (CAB) debt clients owe an average of 66 per cent more than they did in 2001; this is equivalent to 18 times their average household income. It is believed that this amount of personal debt would take 93 years to pay off at a rate that won't further exacerbate financial difficulties.

Individuals that have signed-up to credit agreements prior to April 2007 should check to see whether an illegal credit card or unenforceable loan agreement is in place. This could lead to the debt being written-off and any adverse credit entries being removed. Should serious personal debts in excess of £15,000 be an issue, an Individual Voluntary Arrangement can be used to write-off up to 75 per cent of the money owed.

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