A little debt won’t hurt, will it? That’s how it starts. You make a small purchase on your credit card, and then, before you know it, you're thousands of dollars in debt. But what exactly is wrong with having a little—or a lot—of debt? To start with, here are nine problems debt can cause in your life.
Debt Encourages You to Spend More Than You Can Afford.
There’s something about the debt that tempts you to keep spending even when you can't afford the payments. Part of the allure of debt is the fact that you can get the emotional high from getting new things now, without having to deal with the immediate pain of parting with money. It can feel like you’re getting something for nothing. But eventually, that spending will catch up with you, and it won't feel so good then.
Debt Costs Money.
Debt feels free when you're swiping your card or signing loan documents, but this is an illusion. In general, you pay a price for the debt you create. That price comes in the form of interest. The higher the interest rate, the more you’ll end up paying for your debt. Also, the longer it takes you to pay off and the higher your debt load, the more interest you’ll pay.
The only exception is an interest-free loan or zero percent APR credit card promotion, but even that has a limit and can be lost if you default on your payments.
Of course, if you use a credit card and pay off your balance on time and in full every month, you won't have to pay any interest.
Debt Borrows From Your Future Income.
Any time you take out a loan or charge something on your credit card, you’re borrowing from the money you hope to earn in the future. Do you want to spend your money paying for something you've already used up and don't get much value from anymore? You never know what changes may happen in your income, so it's better not to mortgage your future.
High-Interest Debt Causes You to Pay More Than the Item Cost.
If you buy a $2,000 living room set on your credit card at 11% and only make the minimum payment, you’ll end up paying more than $3,600 by the time you completely pay off the debt. That’s $1,600 more than the furniture cost. Even if you were to raise your monthly payment to $100 and pay off the balance, you’d still pay close to $220 more than the cost of the furniture. On the other hand, you could set aside $150 a month for 14 months and pay in full at no extra cost.
Debt Keeps You from Reaching Your Financial Goals.
Monthly debt payments limit the amount of money you have to spend on other things—not just retirement, but the trip you always wanted to take or Christmas presents for your family. The more debt you accumulate, the higher your monthly payments will be, and the less you have to spend on everything else.
Debt Can Keep You from Owning a Home.
Credit card, auto, and student loan debt are all considered when you apply for a home loan. If your other debt payments are too high, you may get turned down for a mortgage loan. In most cases, your total monthly debt payments can't take up more than 43% of your income if you hope to secure a mortgage. Many lenders want that number to be even lower. That means you’ll be stuck renting or paying on your current mortgage until you pay off some of your other debt.
Debt Can Lead to Stress and Serious Medical Problems.
When you have debt, it’s hard not to worry about how you’re going to make your payments or how you’ll keep from taking on more debt to make ends meet. The stress from debt can lead to mild to severe health problems including ulcers, migraines, depression, and even heart attacks. The deeper you get into debt, the more likely it is that you will face health complications.
Debt Can Hurt Your Marriage.
Debt puts unnecessary pressure on the household’s finances and creates a lack of financial security for your spouse and your children. When both partners feel overwhelmed, it can spark arguments about spending habits, who is creating more debt, and how much debt is too much. These fights can escalate and lead to a breakdown in the marriage.
Debt Hurts Your Credit Score.
Part of your credit score—30% to be exact—is based on the amount of debt you have. The more debt you have compared to your credit limits and original loan balances, the lower your credit score will be. Even if you’re not shopping for a credit card or loan, your credit score affects your life and the cost of other products and services, such as auto insurance.
Frequently Asked Questions (FAQs)
How can I get help with debt problems?
Numerous programs and services can help you get a handle on your debt, including credit-counseling organizations and debt-relief services. Do your research first before signing up for debt relief or counseling, because some of these services charge exorbitant fees that might be better spent paying off your debt. The FTC suggests checking them out with your state's consumer protection agency or attorney general, to ensure that they're reputable.
Can any debt be considered good debt?
"Good" debt can be defined as something that's incurred for a purchase that's fundamentally necessary to your life, such as an auto loan that provides you with a car so you can get to work or a home. But even these loans can quickly transition to "bad" debt if you finance more than you need: not just wheels, but a super-deluxe vehicle model.