There are a multitude of ways you can get into debt. It’s important to realize that some forms of debt can be extremely dangerous, very expensive and negatively impact your credit score quickly. Other forms of debt can help you build wealth over time, for example a mortgage. Most consumers stumble into debt and don’t fully appreciate the differences between these forms of debt.
So what are the most dangerous forms of debt which can cause serious financial trouble? Let’s take a look at the three worst forms of debt.
Credit Card Debt
Credit cards are a handy financial tool which many people use everyday without any problems. Unfortunately credit cards usually have a very high interest rate, many types of fees and their ease of use can lead to problems. In the United States, some credit cards have as much as 28% interest, which quickly turns relatively small debts into serious problems.
If you find yourself maxing out your credit cards, it could be a sign you are in serious financial trouble. Another warning sign that you are using your credit card excessively is that you pay most of your bills on the credit card, but can’t keep up with the credit card repayments.
If you can reduce the number of credit cards you have on rotation, you can save a great deal of money that would otherwise be wasted in interest payments. You can also reduce the size of your credit cards, or look for better deals on your credit cards.
One of themost notorious forms of debt is the payday loan. Essentially, payday loans are short term loans for small amount of money (until the next “payday”). Unfortunately these loans come with excessive interest rates and fees attached to them.
Payday loan lenders tend to target people who are financially stressed, and they take advantage of that financial stress. If you run into trouble paying back a payday loan in the specified time, over a year you can be charged the equivalent of 400% interest on the debt.
These kinds of loans must be your last resort and should only be entered into if you are in a financial pinch. Even then, only get this form of loan if you are certain that you will be able to pay it back within the specified time period.
If you find yourself relying on payday loans on a frequent basis, seek some form of financial counseling. In recent years, more ethical loan providers have started working with consumers who require small and short term loans. Community banks exist in some areas and can provide small loans with interest rates much lower than a payday loan.
Debt to the government
One of the worst forms of debt you can have is unpaid taxes. The IRS is a debtor you do not want to mess with! If you owe unpaid taxes, it will start accumulating interest and there will be a raft of fees attached to the debt. You will also have a real risk of being prosecuted for out standing taxes and even spending time in jail!
You should always lodge a tax return, even when you don’t have much tax to pay, or you cannot afford to pay the full tax bill. Tax returns must be lodged every year to avoid penalties.
If you cannot afford to pay your taxes, the government may garnish your wages or come to some other arrangement with you. You should always be honest with the IRS and make your circumstances very clear to them. If the government suspects you are guilty of tax evasion, they will most certainly come after you!
Credit Cards, Payday Loans and Unpaid Taxes are all very serious forms of debt and must be treated very cautiously. They can all sneak up on you if you are planning your financial life adequately. If you do run into trouble with one or more of these types of debt the consequences can be dire!