In the US, debt is a normal part of everyday life. We all have at least one credit card, sometimes two or three. On top of that, there is probably another form of debt such as a mortgage or car loan. It’s easy breezy and we don’t think much of it. Debt is like a best friend who fuels all of our needs and desires in life. We just keep taking and taking without understanding the painful consequences of having too much debt. Now, it’s time to change all of that by arming ourselves with more financial knowledge so that we can truly choose how to spend our precious money.
DEBT CAN BE POSITIVE
Let me start by saying that debt can be a good thing and it is important because it allows for the redistribution of wealth from those with a surplus to those more in need.
On a national scale, debt supports economic growth by propping up businesses and providing more opportunities of investment. It also allows the government to offer tax cuts and programs such as the American Recovery and Reinvestment Act stimulus package.
On a personal level, debt can allow us to buy a house, go to college or start a business. It also acts as a buffer when there are fluctuations in income and we need certain things in order to survive. But, how much is too much? When does the accumulation of debt stop? What are the real consequences of having too much debt?
HOW DEBT BECOMES A PROBLEM
This has the easy answer. Debt becomes a problem when we live beyond our means. How and why does this happen? Because of our pals capitalism and consumerism who love to drive our culture into a big spending frenzy.
Capitalism is the system in which the US has prided itself on. Individuals and businesses are encouraged to own, invest, produce, and sell goods or services. If you can dream it, you can do it! The sky’s the limit!
But, of course, you need someone to buy those goods and services. That is where consumerism comes into play. Through cut-throat marketing and advertising tactics, people are encouraged to buy things in ever-increasing amounts. Our brains get re-wired. Our habits get re-wired. We end up running on auto-pilot and come to crave something that may not exactly add any value to our lives so that we can keep spending to fuel this economic machine. More spending leads to more debt to the point that the debt quickly exceeds our income.
THE WEIGHT OF DEBT
If you have not really given debt much thought, it is time to be courageous, understand the scary consequences of having too much debt and see exactly what you have gotten yourself into. Knowledge is power. Take it as a way to prevent the unnecessary accumulation of debt or as a small step to taking back your financial power on your debt-free journey.
1.THE MONEY ISN’T YOURS
This is the most fundamental and most important fact about debt. Money in the form of credit or loans comes across easily as free money. Who doesn’t want free money? But, sadly, it is not. The money is not earned and owned by you. It is owned by the banks and the government. They have the control. They have the power. If life hits rock bottom, they can take everything away.
If you are not able to pay off the total amount of debt each month and are only making the minimum payments, you are racking up interest on top of the original debt. In the long run, you end up paying thousands more than the cost of the item and that interest is going straight into the pockets of the lenders. You are, essentially, giving them free money.
3. DEBT IS A GAMBLE ON THE FUTURE
Debt allows for instant gratification and focuses on the short-term. But, what about the future?
You are borrowing from future income. Instead of focusing on building wealth, you are spending hard-earned money paying for what has already been used up. Less wealth accumulates in savings, retirement, and investments over time or you stress as you try to play catch up once debt has been paid off.
3. DEBT CAN TAKE A TOLL ON YOUR RELATIONSHIPS
Finance is often a hot topic in any relationship. Even if one person makes millions of dollars, he or she may still have limits to what they are willing to share with their significant other. Will we share the household expenses? What about gifts, travel, or restaurants? These questions become much more difficult to answer and cause much more stress when one or both people in a relationship have a lot of debt. Will we have enough to pay for our living expenses and our debt? If I am the one with the debt, will my partner or my parents be willing to pay for the majority of the expenses? Will I become too much of a burden and cause too much stress? This may be the most important consequence of debt out of all of them.
4. DEBT AFFECTS YOUR CREDIT SCORE
Your credit score is determined by several aspects of your credit and payment history including debt. Debt makes up about 30% of this score. Credit bureaus are looking at the ratio of utilization to original loan balances and credit limits when determining the impact of debt on the credit score. If you use more than 30% of your credit, chances are your credit score will go down and that will affect various aspects of your life. A bad credit score makes it difficult to buy a new home, to rent a new apartment, to get certain jobs, and to be approved for new loans or credit.