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5 financial lessons from the banking mess

Too much debt can lead to financial ruin
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One common characteristic of the companies that failed during the financial crisis was excessive debt. From 1978 to 2007, the amount of debt held by the financial sector soared from $3 trillion to $36 trillion, more than doubling as a share of gross domestic product, according to the commission's report. Lehman Brothers alone folded with as much as $613 billion in debt, according to its bankruptcy filing.

The problem with carrying so much debt is the cost of servicing it. Making the scheduled principal and interest payments can skyrocket beyond a firm's ability to pay.

Many Americans also suffer from the destabilizing effects of excessive debt, which is particularly dangerous in an economy where household earners' jobs are in jeopardy.

"Having available credit is a fantastic thing for a consumer. It lets people have a lot more flexibility," Kennedy says. "Unfortunately, it can turn on you pretty quickly in a big way."

That's especially true of debt with variable interest rates, such as credit cards, home equity lines of credit and variable-rate mortgage loans.

"If your rates go up on your debt and you're already struggling, it's just like throwing gasoline on a fire," Kennedy says.


 

 

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