Debt isn’t inherently negative. The option to pay using a credit card or take out a loan can enable consumers to make big-ticket purchases they otherwise couldn’t afford outright. But debt can also become a personal finance problem, as many Americans can attest. CNBC reports that nearly half (43 percent) of U.S. consumers have carried a credit card balance for two years or more. And the average American household with credit card debt owes nearly $17,000. These statistics illustrate how commonplace debt is—and also how challenging it can be to eliminate in a timely manner.
When you consider the short- and long-term consequences of debt, the importance of figuring out how to pay down debt becomes apparent. Here are just four side effects of living with significant debt.
The impact of debt can extend beyond financial health alone. One study of nearly 34,000 participants published in Clinical Psychology Review found “people who are in debt are three times more likely to have a mental health issue” than those who are not.
Many people find debt to be a stressful state—and understandably so. It can be tough to relax when you’re trying to figure out how you’re going to come up with your next credit card payment. Money-related worries can easily interfere with sleep and work. Debt can even put a strain on interpersonal relationships, often because consumers with debt feel a sense of shame.
Debt denial occurs when people try to distance themselves from negative feelings by ignoring their financial reality. As difficult as it is, it’s important to face debt head on to alleviate the root cause of these negative emotions.
After a few months of nonpayment, creditors will turn your debts over to collection agencies. Representatives from these companies will reach out, often repeatedly, to solicit repayment. Receiving these notices can be stressful. And though the only way to stop them once and for all is to eliminate debt, consumers should be aware of their rights. As the Consumer Financial Protection Bureau outlines, debt collectors may not:
- Contact you before 8 a.m. or after 9 p.m.
- Contact you at work if you tell them this is not allowed.
- Harass you or anyone you know.
- Contact you if they know you have an attorney representing you.
If paying your debt in full seems unlikely at this point, there are options to explore. Creditors and debt collection agencies alike would rather receive something than nothing at all. For this reason, debt settlement can be an effective strategy for consumers already receiving notices.
Here’s how partnering with a debt settlement organization works: Consumers pay into a dedicated account each month. When their balance reaches a certain threshold, trained negotiators reach out to creditors, attempting to settle credit card debt for less than the original balance. While this does not stop collection notices—as you cease repaying debts for a period of time—it can ultimately zero out balances if a settlement is reached.
The key is making sure you enroll in a reputable program if this is the route you choose to pursue. Say, through online research, you find Freedom Debt Relief to be an industry leader in successful debt settlement. It’s still your responsibility then to look up Freedom Debt Relief reviews to see what real clients are saying about their experience.
Sustained revolving debt, like credit card debt, can damage your credit score. Why? Well, the amount you owe accounts for approximately 30 percent of your FICO score.
Last but not least, carrying debt tends to diminish the amount you can contribute toward savings. The less you have stashed away in your emergency, savings and retirement accounts, the more precarious your overall financial situation becomes, especially if you ever lose your primary source of income.
These short- and long-term consequences of debt illustrate why it’s so important to work toward actively eliminating debt for your own financial well-being.