Unless you’ve been living under a rock, you probably know that debt can be bad news. It costs you money, it causes stress — it even played a role in the recent financial crisis. However, despite all the grim warnings, there are probably a few things that you don’t know about your debt , or at least haven’t considered.
If you’re still sitting on the fence about whether to make a commitment to pay off your debt once and for all, check out a few of the effects of debt. They might just tip the scales in favor of a debt diet.
#1. Debt Reduces Your Effective Income
Suppose that your boss said he’ll be reducing your pay several hundred dollars per year. You’d be, understandably, furious.
Now consider that according to the Federal Reserve Bank of Boston, the average consumer with a credit card carried a balance of $15,596. If you make only the minimum payment on this debt (which, let’s face it, at more than $300 might be all many people can afford), you will pay more than $200 per month (at a 18 percent interest rate) in interest charges each month. And that’s assuming that you don’t add any more to that balance in the meantime.
Think about it — that’s $200 of your hard-earned money each month for absolutely nothing. Oh, and at this rate, it’ll take more than 50 years to pay off the balance at a cost of more than $44,000.
#2. Debt Has a Tendency to Get Out of Control
No one likes to believe that their debt will spiral out of control. Unfortunately, if a spending problem is combined with interest charges, that’s often exactly what happens.
In 2010, new credit card rules came into effect in the U.S. that force lenders to provide additional information to borrowers on their credit card statements, including how long it will take them to pay off their debt if they only make the minimum payment.
If you have some credit card debt, you should check this out. You’ll be shocked to note that 15 years from now, you could still be paying off the debt for the spring break you spent in Cancun during your sophomore year in college. If that sounds depressing, consider that lifelong repayment plans are not at all uncommon, which is why these rules were adopted in the first place.
#3. Debt Can Affect Your Purchasing Power
So you know that debt can drag down your effective income, but as if that weren’t bad enough, it can also cut into your purchasing power in a different way: By reducing your ability to borrow. And by borrow, I don’t mean rack up more credit card debt on everyday expenses, but to borrow for those milestone purchases, like a home, or even a car.
When borrowers consider your case for a loan, they look at all the other places your money is going to determine whether you’ll have enough to make payments to them. Debt is a major factor in this decision; if you’re already paying a lot of other debts, a borrower may decide that you’re already stretched too thin to afford to take on more.
It’s pretty tough to buy a home or a car without debt. That’s why it’s best to save your borrowing for things that count. After paying a mortgage, you’ll have a valuable asset — and somewhere to live. That’s worth a lot more than a bunch of random credit card charges.
#4. Debt Puts You on the Edge
Carrying debt isn’t such a bad thing if you can make the payments, but what happens if you lose your job, get sick or are faced with some sort of family emergency? Many people are comfortable with debt, and never give the risks a second thought — until it’s too late.
This can mean default, repossession, even bankruptcy. Even when life is going well, carrying substantial debt puts you on the edge because it assumes that you’ll always have the money to make the payments. Unfortunately, life just isn’t that predictable, and if your luck runs out, so will your options.
#5. Debt Is Bad for Your Health
Does your credit card statement make you sick to your stomach? It’s no coincidence. High rates of debt have been linked to stress and health problems such as ulcers, migraines and even heart attacks. Paying off a big debt is hard work, but there’s nothing a credit card can buy that’s worth dying for.
Debt: Is It Really That Bad?
Is debt really that bad? It depends on your situation, but if you carry a lot of debt, you’re essentially leaving your financial future up to chance. Meanwhile, your debt is cutting into your disposable income, your purchasing power and your ability to hold your financial life together. Now you know, so what are you going to do about it?