It's no secret that debt is a big problem. For the last few decades, we've become more and more comfortable using credit and putting off the pain of paying for things until later. The meltdown of the sub-prime mortgage market and the ensuing global financial crisis made a lot of us wake up and realize how much trouble we were in.
Yet today, it's still all too easy to get ensnared in a nasty debt trap that could derail your finances and prevent you from accomplishing your dreams. Here's a look at some of the most dangerous "debt traps" and how to avoid them:
The "Credit Card Rewards" Trap
It's true that rewards cards can be a powerful way to earn free trips and cash back, among other perks. But a significant number of people who sign up for those credit cards with the best of intentions end up going into debt. Why? Because it's just so easy to use good ol' credit card to make an extra purchase here and there. Before you know it, the rewards card has turned into a "Get Into Debt Free" card.
In order to avoid this trap, be realistic with yourself when thinking about applying for a rewards credit card. Ask yourself: will I be able to use this card responsibly and pay off the balance every month? If you have any doubt, skip the rewards card and focus on being debt free while you pursue your long-term financial goals.
The "Brand New Car" Trap
Do we deserve a brand new car? The people in those ubiquitous car commercials on TV certainly seem to think so: while we watch a sleek car drive along a picturesque mountain road, a voice tells us how easy it is to afford this year's model. "It's just 36 monthly payments of $400!" The problem is, financing a car with monthly payments puts you in the position of paying interest -- not to mention taking a huge chunk out of your income.
Rather than automatically looking to buy a brand new car (and take on the $20,000 of debt that goes with it), sidestep the hustlers and look for a good deal on a used vehicle. Oftentimes, cars that are 3, 5, or even 7 years old can still be quite reliable. And they cost far less. Use the money you've saved to balance your budget, start funding your retirement account, or save up for a house.
The "Student Loans" Trap
The number of people taking out student loans to pay for college has skyrocketed in the last 30 years. There are several reasons for this, but one of the biggest is that the price of a college education has risen faster than the price of just about anything else. While some student loan debt may be necessary to achieve your education goals, today too many high school students are being told by their parents and teachers that student loans are a part of the college experience. Four years later, with a degree and $40,000 of debt, the students aren't so sure.
If you're currently thinking of taking out student loans, proceed with caution. It may be that student loans will help you get a fantastic education and start you on a fulfilling and lucrative career path. But don't take anything for granted. Do plenty of research on alternatives to taking out student loans and talk to others to find out what it's like to pay off their loans after college. Making an informed decision will help you avoid regret later on.
The "Traveling the World" Trap
Travel is such a common desire among people of all ages that it's safe to say there's something human about wanting to explore the globe. However, traveling can be costly, and if you're putting off the travel expenses until later then you're going to wind up with a lot of debt as a result of your trip(s).
No one should get crushed by debt just because they want to travel. So how to avoid it? First of all, if you're planning a trip make sure you learn how to travel on a budget - before you leave the house. And even more important, save up the money for the trip beforehand so you know exactly how much you can spend - without any debt.
The "Looking My Best" Trap
It's amazing how easy it is to spend lots of money on clothing and other items whose purpose is to make you look good. While it's important to have clothes that fit well and make you feel your best, a lot of us take it too far. We think that wearing the latest trends is a must, and so we rack up tons of credit card debt on new shirts, jeans, shoes, and coats that we don't need.
To avoid getting buried in "shopping" debt, take a hard line with yourself. First, make a budget that includes a specific amount for clothing and other apparel. Then hold yourself accountable and stay away from the mall (and department stores) once you've reached your limit for the month.
With a little planning and a little "tough love" you can keep yourself out of debt. Just remember to avoid the five debt traps above, and if you start thinking about making a purchase that will result in debt ask yourself what you can do instead. Your future financial picture will look a lot brighter as a result.
Benjamin Feldman writes about personal finance topics such as budgeting, student loans, and paying off debt for ReadyForZero.com, a free website that helps people pay off their debt. You can find him on Google Plus and Twitter.
Image from B Rosen