Debt Risk Basics - Avoiding Financial Traps

Purpose: identify dangerous debt early, prioritize payoff, and avoid losing critical assets during stress periods.

Do This First (20 Minutes)

List every debt with balance, APR, minimum payment, and collateral risk.
Mark debts tied to essentials first: housing, vehicle needed for work, critical utilities.
Calculate debt-to-income ratio using gross monthly income.
Choose one payoff method and stick to it for 90 days before changes.

Tools and Materials

Risk Scoring Table

Debt Type	Typical APR	Default Consequence	Risk Score (1-5)
Mortgage / rent arrears	varies	Housing loss risk	5
Auto loan (work vehicle)	6 to 18%	Repossession risk	5
Credit card revolving	18 to 35%	Compounding interest spiral	4
Payday / title loan	80 to 400% effective	Rapid debt trap	5
Medical payment plan	0 to 15%	Collections risk	3
Family/friend debt	varies	Relationship damage	3

Warning Thresholds

Decision Table for Payoff Priority

If this happens	Do this now	Backup action	Verify
Debt tied to housing/work asset	Protect minimum payment first	Hardship request same day	No repossession/eviction trigger
Very high APR debt	Attack highest APR after essentials	Consolidate if terms improve	Monthly interest declines
Income shock	Move to minimum survival budget	Freeze nonessential spending 30 days	All critical payments current
Collector pressure	Request written validation	Use documented payment plan	All calls and letters logged

Payoff Methods

If you quit plans easily, snowball may outperform in real life even if avalanche is cheaper on paper.

Common Mistakes and Fixes

Mistake: borrowing to cover routine spending. Fix: cut expenses before adding debt.
Mistake: missing due dates by accident. Fix: calendar + weekly payment check.
Mistake: ignoring letters and calls. Fix: respond in writing and keep copies.
Mistake: closing oldest card abruptly. Fix: reduce utilization first, then review closures.
Mistake: no emergency cash. Fix: build starter buffer to prevent relapse borrowing.

Scenario Drills

Printable Debt Checklist

Safety note: avoid signing new debt contracts when exhausted or pressured. Sleep on it and re-check total repayment cost.

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