Are you looking for the most common debt traps to avoid? Don't worry, I've got you covered.
Debt - that dreaded d-word. As a young adult, you're probably familiar with credit cards, student loans, car loans, and tempting "buy now, pay later" deals. But not all debt is bad. Some can help build your future, while others can wreck it.
As a young adult myself, I get the struggle is real. So, let's dive into the world of debt, learn how to avoid debt, how to manage it wisely and the best way to avoid getting falling for money traps.
This post explains the essentials of debt —the good, the bad, and the downright ugly—and provides strategies for managing them, paying them off, and building a stronger financial future.
Alright, let's dive into the wild world of debt.
This post is all about the most common debt traps to avoid.
MOST COMMON DEBT TRAPS TO AVOID
The Credit Card Trap
The Payday Loan Trap
Buy Now, Pay Later Trap
Lifestyle Inflation Debt Trap
"Debt is like any other trap, easy enough to get into, but hard enough to get out of." - Henry Wheeler Shaw
Healthy 'Good' Debt
Yes, there is such a thing as good debt. This is the kind of debt that helps you acquire assets that appreciate in value or increase your earning potential.
Understanding Leverage: Leverage is borrowing money at a reasonable interest rate to invest in something that will generate higher returns over time. Using debt strategically provides some significant advantages. Personal finance means using debt to improve your position, such as through mortgages, student loans, or business loans. Smart leverage is a powerful wealth tool when used responsibly.
Mortgages, The Path to Homeownership: Buying a home is a classic way to build wealth. Mortgages let you buy property, and over time, you build equity. It’s better than renting because eventually, you’ll own the home outright.
Student Loans, Investing in Your Earning Potential: Student loans can be good if they help you get an education that boosts your earning potential. I know those monthly repayments are a drag but remember Warren Buffett’s advice: "The best investment you can make is in yourself."
Business Debt, Fueling Growth: If you’re an entrepreneur, a business loan can help you start or expand your venture. Borrowing money to grow a business can be a smart move if managed well.
Good Debt Caveats
For debt to qualify as "good," the interest rates must be reasonable and manageable relative to your income. It would help if you also had a concrete strategy for using the debt productively to generate positive returns rather than letting it spiral into a burden. Good debt only works in your favor if you make it work for you.
It's essential to remember a few key caveats: Always do your research and understand the terms of your loan. Pay your bills on time to avoid payment/ fees. Keep your debt-to-income ratio in check. Prioritize your financial goals and avoid taking on too much debt. Don't overextend yourself; always consider interest rates, and have a repayment plan.
Toxic 'Bad' Debt
Now, let's talk about the dark side of debt. Bad debt can be a financial nightmare. The kind that will slowly bleed your finances dry and keep you trapped in an endless cycle of high interest and money stress. Let's look at a few examples of "bad" debt to avoid.
Exhibit A: Credit card debt.

The Credit Card Trap: Credit cards are a prime example of "bad" debt when balances are carried over month-to-month with high interest rates. Credit card interest rates are designed to work against you, slowly draining your wealth over time with those ridiculous double-digit APRs.
Consider "APR" (Annual Percentage Rate), the yearly cost of borrowing money, including fees, expressed as a percentage. Knowing what APR means can save you from unexpected loan agreements or credit card bill costs. Avoid using credit cards for everyday expenses, and pay your credit card balance in full each month, especially if your 0% interest rate introductory period is over.
Carrying a balance means you're buying things you couldn't afford in the first place, PLUS paying huge interest. Racking up a balance you can't pay off in full is a slippery slope. With interest rates ranging from 15% to 30% APR or more, it's easy to get stuck in a cycle of debt.
And it compounds, so your balance keeps snowballing over time, making it nearly impossible to pay off. Those 20%+ interest rates are insane. Paying only the minimum will leave you owing money for YEARS, while interest fees cause your balances to balloon. So, stick to only charging what you can afford to pay off in full each month!
According to a survey, 28% of Americans believe paying off their credit card debt will take at least 5 years (Clever Real Estate Survey, 2023).
This survey also discovered that more than 3 in 5 Americans (61%) have an average of $5,875 in credit card debt.
So if you do, too, you're not alone! Credit card companies regularly target students and young adults with enticing offers, preying on their lack of financial knowledge. This usually leads to massive credit card debt. Many young adults believe buying things on credit is free money, but it's not; you will have to pay that money back with interest if you're not careful.
The Payday Loan Trap, A Short-Term Fix with Devastating Consequences: These are short-term loans with extremely high interest rates. They might seem like a quick fix, but they can quickly turn into a financial nightmare. You'll get hit with annual interest rates that make credit cards look tame, often over 300% APR.
That's how a $500 loan can quickly spiral into a $2,000+ nightmare. Avoid these at all costs unless you want to get sucked into a black hole of debt. It's an incredibly vicious cycle that can devastate your finances in the long run.
These loans are designed to trap you in a cycle of needing to re-borrow, digging the hole even deeper. Avoid payday loans at all costs.

"Buy Now, Pay Later" (BNPL), The Rise of Installment Plans: Buy-now-pay-later (BNPL) plans are all the rage with online shopping these days. These convenient and slick services let you pay for purchases in interest-free installments, and they are increasingly popular, but they can be a financial trap.
Offering the ability to purchase items immediately and pay in installments is very tempting, but those 0% periods only last for a limited period of time. With interest rates and fees hidden in the fine print, it's easy to get stuck in a cycle of debt. You could get hit very hard with accumulated interest charges and late fees, turning that seemingly good deal into a costly mistake.
Making BNPL plans just as slippery as credit cards if you aren't careful. Breaking up a more significant purchase into smaller interest-free installments seems harmless. But with one late payment, you could get smacked with crazy high-interest charges on the total balance. If not managed properly, they can encourage overspending and accumulate unexpected debts.
I avoid BNPL plans and opt to pay with cash or a credit card instead. When it comes to these plans, I now live by the motto, "If you can't afford to buy the item outright, you can't afford it." I tell myself this whenever I see an item I want to buy.

Lifestyle Inflation Debt, When Income Increases, So Does Spending: I'm talking about financing a bigger apartment, a brand-new car, and a bunch of expensive new toys the second you score a pay raise - without actually being able to afford that lifestyle long-term. Lifestyle inflation can quickly trap you under a mountain of bills and debt your income can't sustain.
As your income increases, it's easy to get caught up in a cycle of spending. When you get a raise, and suddenly you're dining out every night, then you know there's an issue. Immediately inflating your lifestyle with things you want but don't need and can't sustain long-term is a swift path towards getting trapped by debt you accrue trying to keep up with your elevated spending habits.
Avoid lifestyle inflation by prioritizing your financial goals and avoiding unnecessary expenses. Remember, just because you can afford more doesn't mean you should spend more. That money could be put towards saving for a rainy day such as an emergency fund.

Other Toxic Sources of Debt Traps
From auto and personal loans to home renovation financing and cash advances on credit cards, tons of other sneaky debt sources can become nightmares if you're not careful. The common thread is the high interest rates, making it an uphill battle to build wealth while servicing those debts.
More toxic sources of debt include:
High-interest personal loans
Unsecured loans
Debt consolidation loans with high fees
You must be aware of more than personal loans for unnecessary wants or predatory car financing with crazy interest rates. There are also downright ugly debts to consider, and sometimes, when life throws you curveballs, this debt can feel impossible to climb out of.

Downright 'Ugly' Debt
Unfortunately, some debt can have devastating consequences. They are the ugliest, most insidious forms of debt. The kind that doesn't just cause financial ruin but completely destroys your emotional well-being too.
Predatory Lending: This is where debt gets downright ugly and abusive. I'm talking about those "payday advance" shops on every corner, adverts popping up in your face, or shady-looking used car lots that rope you into loans with 100%+ APRs and hidden fees out the wazoo. We're talking about sketchy lenders using deceptive tactics, hidden fees, aggressive collection practices - anything to exploit people's desperation and trap them in endless cycles of debt.
These lenders are the villains of the finance world as they specifically target people who are most desperate for money by trapping them in debt they'll never be able to escape. I cannot emphasize this enough - stay far, far away! They are always lurking with offers that seem too good to be true because they usually are. Watch out for any whiff of predatory lending and run in the opposite direction.
Medical Debt, Unexpected and Crippling: A terrifying reality is how quickly medical emergencies and health crises can create soul-crushing debt, again, through no fault of your own, even if you have insurance. This can hit like a jump scare in a horror flick—unexpected and terrifying. It's one of the hardest types to control because who plans to get sick? To be prepared for a healthcare disaster, you need health insurance, and I'm not talking about the cheapest one you can find.
Studies have shown that 57.1% of Americans who went bankrupt cited their medical bills as a contributing factor because they didn't have enough health insurance (NCBI, 2019).
Let's take a brief look at the different types of insurance a young adult like you may need to prevent you from entering the ugliest form of debt, depending on your circumstances and lifestyle.
Different Insurance For Young Adults
Here's a summary of the most common types of Insurance you're likely to need to prevent you from slipping into the 'ugly' side of debt:
- Health Insurance: Covers medical expenses in case of illness or injury. It's essential for accessing healthcare services, preventive care, and prescription medications.
- Auto (Car) Insurance: Legally required if you own and drive a car. It protects against financial losses due to accidents, theft, or damage to your vehicle or others' property.
- Renter's insurance: protects your personal belongings if you rent a home or apartment. It covers losses due to theft, fire, or other perils listed in the policy.
- Life Insurance: Provides financial support to beneficiaries in case of death. While it might not seem necessary at a young age, it can be valuable if you have dependents or significant debts.
- Travel Insurance: Covers medical emergencies, trip cancellations, lost luggage, and other unexpected events while traveling abroad. It's recommended for frequent travelers or those embarking on long trips.
Additional types of insurance to consider:
- Disability Insurance: Replaces a portion of your income if you cannot work due to illness or injury.
- Pet Insurance: Covers veterinary expenses for your pet's medical care.

It's important to assess your needs, budget, and risk tolerance when deciding which insurance policies to purchase. Consulting with an insurance agent or broker can help you find the right coverage options for your individual circumstances. But whatever coverage you get, make sure it actually covers everything you will be expected to need if a total health disaster were to happen. We can't prepare or predict everything; that's why we have insurance, just in case.
From five-figure surgeries to crushing ongoing costs for managing chronic illnesses, medical debt is a uniquely painful beast that shreds apart people's financial and mental stability. Thanks to our broken healthcare system, countless Americans find themselves drowning in massive medical debts that are impossible to plan for. It's one of the cruelest forms of debt.
Medical emergencies, especially in countries like the US without universal healthcare, can devastate people financially.
90% of those who had homes took out a second mortgage on their homes to pay for their medical debt, turning medical debt into even more debt (American Bankruptcy Institute, n.d.).
But let me tell you, even countries with universal healthcare are going down the toilet, like the United Kingdom's National Health Service (NHS). I live in England, UK, when writing this book, so I know. Such challenges can negatively affect your mental health. Avoid medical debt by having a solid health insurance plan and budgeting for unexpected expenses.

The Mental Toll of Unmanageable Debt: Out-of-control debt doesn't just wreck your finances; it can also take a huge psychological toll. The stress of overwhelming debt can impact overall mental and physical health.
The constant anxiety, shame, guilt, feelings of hopelessness and despair, and even feelings of being trapped can absolutely demoralize you over time. Debt destroys relationships and erodes your sense of self-worth. Sometimes bankruptcy is the only way to get out from under that crushing mental burden. If your financial situation has become unbearable, there's no shame in seeking a fresh start.
Other Ways out of the Debt Traps

Filing for bankruptcy is one way to avoid a debt trap.
Bankruptcy, When the Burden Becomes Too Great: When your financial burden is so heavy that the only way out is to wipe the slate clean, it's a tricky reset button to hit. For some people struggling under extreme debt loads, bankruptcy is sadly the best or only path to getting a truly fresh start and becoming debt-free. It's an absolute last resort, but filing for bankruptcy can provide the exit ramp from a vicious debt cycle that would otherwise darken your financial future indefinitely.
A fresh start is sometimes necessary, but it comes at a high cost and has long-term consequences. While bankruptcy can sometimes feel like the only way out of an impossible debt situation, it's important to understand the significant and lasting consequences before making this decision.
Immediate Consequences
- Emotional and Psychological Impact: Filing for bankruptcy carries a social stigma that can be emotionally draining, causing stress, anxiety, and feelings of shame or guilt. The process itself is complex and stressful, often requiring legal assistance.
- Loss of Assets: Depending on the type of bankruptcy filed, you may be forced to liquidate assets like vehicles, non-essential valuables, or even your home to repay creditors.
- Limited Access to Credit: Your credit score will take a severe hit, making it difficult, or very expensive, to obtain credit cards, loans, or even rent an apartment for several years.

Long-Term Consequences
- Rebuilding Creditworthiness: Bankruptcy can significantly lower your credit score, making it challenging to obtain credit in the future. A bankruptcy filing can remain on your credit report for up to 10 years. It takes significant time and effort to rebuild your credit score after bankruptcy. You'll need to demonstrate responsible financial behavior with limited credit options.
- Limited Credit Options: After bankruptcy, you may struggle to obtain credit or loans. Lenders may view you as a higher risk, making it challenging to secure credit or loans. You may be forced to rely on alternative financial products with higher interest rates or fees.
- Higher Interest Rates: Expect significantly higher interest rates on any credit lines you qualify for, as lenders perceive you as a higher risk. This translates into higher costs for everything from car loans to mortgages.
- Employment Barriers: Some employers and landlords run credit checks, and a bankruptcy on your record may limit your options in these areas.
- Education Consequences: Bankruptcy can sometimes affect your education opportunities. For example, some professional licenses or certifications may be revoked or suspended.
- Public Record: Bankruptcy filings are public records, meaning anyone can access the information. This can lead to embarrassment, shame, or even social stigma. Bankruptcies remain on your credit report for 7-10 years, depending on the chapter filed. This public record is accessible to potential lenders, landlords, and even some employers.

Alternatives to Bankruptcy
Before considering bankruptcy, it's essential to explore alternative options:
- Credit Counseling: Non-profit credit counseling agencies can help you develop a budget and debt management plan.
- Debt Consolidation: Consolidating debt into a single loan with a lower interest rate can simplify your payments and reduce debt.
- Debt Settlement: Negotiating with creditors to reduce debt or settle for less than the original amount can be a viable option.
- Financial Education: Improving financial literacy and budgeting skills can help you manage debt and avoid future financial crises.
While bankruptcy is a serious decision with long-term impacts, it doesn't mean your financial life is over forever. It's essential to explore alternative options and seek professional advice before deciding. Remember that bankruptcy is not a quick fix, and it's crucial to consider the long-term implications on your financial well-being. You can rebuild and regain financial stability with time, commitment to responsible financial practices, and seeking professional guidance when needed.
Final Thoughts on The Most Common Debt Traps To Avoid

By understanding these common financial pitfalls and adopting these strategies, you can avoid debt traps and keep your finances healthy. Remember, the best way to avoid debt is through proactive and informed financial management.
Check back to my blog every week for more helpful content to help you manage and level up your finances.
You've got this. Your debt-free future's so bright, you're gonna need shades! Just keep putting one foot in front of the other, and you'll get there - I'm in your corner!
This post was all about the most common debt traps to avoid.