Carrying debt is a way of life for many people, but is it really a problem? After all, you need credit to buy almost anything nowadays. Nonetheless, there must be negative effects of carrying debt, especially when you borrow more than you should.
According to the Federal Reserve Bank this is happening to many people already. Auto and credit card delinquency rates are high and household debt continues to rise annually. This suggests many people are already feeling the debt effect which can ripple throughout anyone’s lifetime creating many negative impacts.
How does debt impact a person’s net worth?
When you see how much you owe on your credit cards and/or personal loans it may not mean that much to you. The numbers on the statements go up and down, you pay what you can, and you carry on with your life.
Still, debts are liabilities. They’re not just numbers on a screen or piece of paper. What you owe comes straight off the value of what you own. In other words, if you sold everything today and paid off your debts, what is left is your net worth.
Calculate yours now to see how your debts are impacting your financial well-being. Do you have net worth or are you in the hole, because you’re carrying debt that you can’t really afford?
Negative effects of debt
Debt is a burden. There’s no getting around it. You may be able to push those bills aside for a time, but eventually they come back to haunt you.
Maybe you lose your job or get sick. Maybe you split up with your partner. Maybe the market crashes and you lose your savings. Change can happen without notice and what was once manageable debt can suddenly become a monster.
Managing multiple debts or struggling with large debts has an impact. Throw in the unexpected and it can become a disaster.
Unsurprisingly Debt.org states stress is one of the most common problems associated with debt. Even when you aren’t consciously aware of it, debt lingers in the back of your mind and upsets your life. When you suddenly become very aware of it due to an event, things can become much worse.
Mental health issues such as anger, depression, anxiety, low self-esteem, and even lower mental cognition are common. Carrying debt can make it hard to think straight, never mind make good decisions for yourself and your loved ones.
Negative effects of debt on young adults
According to an article in the Journal of Financial Counseling and Planning, Millennials age 18 to 30 are under even more debt stress than most. Today’s youth carry more debt than previous generations, especially when it comes to student loans and credit cards.
Credit is very easy to obtain when you are young and getting it can feel empowering. Yet, debt has an adverse effect on mental health over the long term. As a result, managing debt is especially important for the well-being of young adults.
Still, most parents don’t always teach financial skills to their children. Yet, there is hope. Any young adult that needs help can access free resources through a free credit counselor.
Getting your finances under control earlier in life can lead to habits that will support you forever. You can easily alleviate the impact of student debt on your life by exploring the many options available to you through a professional.
Effects of student debt
The impact of student debt on individuals goes beyond mental and physical well-being. It can also affect your ability to buy what you want and how much you can save, considering student debt has more than doubled over the last two decades.
As an example, if you have too much student loan debt it can be difficult to buy a home. Student loan payments can also make it difficult to save for retirement. Failing to make student loan payments on time can also lower your credit score.
In some cases, your student loans may be forgiven. Alternatively, you may qualify for reduced payments through Income-Driven Repayment Plans. If you have student debt, definitely explore what is available to you and reduce your student debt as much as possible.
Effects of credit card debt
Whether you are young or old, credit card debt can be very hard to manage. Why? Credit cards use a different formula to calculate interest than most other forms of credit.
Compound interest increases your indebtedness quickly and consequently costs you more money. Credit card debt has a tendency to grow quickly too, since you can continue charging even when you haven’t paid off the balance.
What’s worse is that you can also use your credit cards for cash advances when you’re in a financial pinch. What you may not realize is that interest on cash advances starts immediately and at a much higher interest rate.
Does medical debt impact credit?
If you deal with your medical provider and don’t take too long to settle your debts, your credit should be fine. If you don’t pay your bills, it can be a different story.
Depending on the provider, you may have 60 to 180 days before they send your file to a debt collector. However, your debt will not appear on your credit reports unless it is over $500 and more than 365 days old. You have a one-year grace period to work with your insurer to set up a payment strategy.
If you pay, the bill shouldn’t appear on your credit reports. If you don’t pay, the collection account will appear on your credit reports. Collections stay on your credit file for seven years and they definitely lower your credit scores.
How can you get out of debt?
Considering all the negative effects of debt on you now and into the future, you should do what you can now to reduce how much owe. Luckily, you have many options.
Make larger payments
If you’re burdened with credit card debt, always try to pay more the minimum payment. Minimum payments pay interest, but they do not reduce your balance. Every month your creditor will tack on more interest and your balance will grow.
Use cash
Try using cash for purchases. Plastic makes it too easy to overspend since it doesn’t feel like real money. Credit card cashback and points won’t make up for a tendency to overspend.
Try the snowball effect debt reduction method
One of the most motivating ways to reduce debt is the snowball method. Start with your smallest debt and once you’ve paid that off, direct your money to the next largest bill.
This method is great, because you get a boost every time you knock off a bill. This makes you accomplish even more, instead of feeling overwhelmed by your debt load.
Try the avalanche debt reduction method
This isn’t as motivating as the snowball effect, but it is a smarter way to approach debt since you direct your money towards the debt with the highest interest rate.
Once you’ve paid off your first, most expensive debt, you take the money you were paying on that first debt and focus it on the next most expensive debt. This saves you a load of money in interest.
Use a budget
Many people cringe when they hear the “b” word, but there’s no need for that. A budget doesn’t mean you need to suffer and it doesn’t have to be difficult either. A budget just tracks what you spend so you can use your money better.
Budgeting apps make it very simple to do this. It does take a bit of work initially, but after that it is a fairly automated process. Once you see where your money’s going, you will probably want to change your spending habits.
Consolidate your debts
This doesn’t eliminate your debts, but it can help you pay less interest. It can also reduce the complexity of managing your debt, since you only pay one payment.
Essentially, you take out a personal loan at a good interest rate and pay off your high interest debts. This can work well with a budget since you know precisely how much you pay each month.
The amount you used to pay towards high interest debt can now go towards an emergency fund so you don’t need to rely on credit every time something happens.
Of course, a debt consolidation loan isn’t a good solution unless you curb your spending. Otherwise you’ll just have another debt to pay. Luckily, when you’re repaying loans you can succeed with a solid repayment strategy.
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