Debt has become so much a part of life that it is often viewed as a necessity. With costs rising faster than inflation, it is not hard to justify financing purchases. Consider 2015 cost of living numbers. The median price for a home is $213,800, the average car sold for $31,252, and the average cost for a year of college was over $30,000. These staggering costs are difficult to save money in a culture that wants everything today.
The truth is, carrying debt in any form has consequences. Wise use of credit will allow you to build wealth and grow your income faster than paying cash for items like a college education or a home. Leveraging debt for these purposes can have positive results.
On the flip side, there is the negative aspects of carrying debt, especially when it becomes more of a burden than a benefit. When you finance wants instead of needs, debt can take control over your budget. When you begin financing disposable goods instead of appreciating assets, you become a slave to debt payments long after the goods have lost their value.
Lack of preparedness for a financial crisis can lead to buying essentials on credit. It is easier to charge your way out of hard times, than cutting back on spending, especially if credit is readily available on a credit card. Whatever the reason for debt accumulation, the consequences are the same.
The Top 10 Consequences of Too Much Debt
Credit score impact is one of the first signs that you have too much debt. Taking out a mortgage or car loan will not typically have a negative impact on your score because it is a fixed payment, even though balances may be high. Credit card and equity line balances impact your score based on utilization. This is the ratio between available credit and current balances, and accounts for 30% of the FICO score. When balances rise above 50% of the available credit limits, your score begins to fall. The more leveraged you are, the higher risk you are to the lender because your risk of default is greater. When the utilization ratio is high, lenders are also more likely to lower your available balance, raising your utilization ratio even more. It is nearly impossible to have a 700 credit score with maxed out credit cards.
Loan application declines follow lower credit scores. Being turned down for a loan is an indication that you need to address current debt issues before borrowing any additional funds. Buying your way out of debt can lead to more problems than solutions, unless spending behavior changes are made simultaneously. Lenders review current debt obligations compared to income when evaluating a loan application. They are only seeing what is on your credit report, meaning your financial situation may be even more dire than the lender is able to see.
Higher borrowing cost also follows a lower credit score. Interest is charged based on your perceived risk of default to the bank. When a lender is confident that you will make on time payments, they reward you with lower interest and better terms, helping you better leverage your debt. Zero percent financing offers on cars is an example of how someone with excellent credit can leverage debt. When your overall debt is high, lenders are concerned about a default and that is reflected in the offer. This might include higher interest, annual fees, and higher late fees, than those with stellar credit. Paying 15% or more for credit card debt can result in thousands of dollars in interest payments for those with revolving balances.
Compounding interest is either working for you or against you. When saving and investing money, compound interest benefits you by increasing balances incrementally faster than cash under the pillow. Debt works the same way, except it is benefiting the lender. You pay interest on interest when you roll balances from month to month, making it more difficult to pay off debt once it is in place. This is expressed in the rate versus the yield. As your credit score declines, interest rates rise, compounding the problem even more. The debt cycle can snowball out of control very quickly with one financial hiccup which can result in an avalanche of higher interest, late fees, and penalties.
Declines for services or higher deposit requirements. More companies are using credit reports and credit scores to evaluate applications. Rental companies, utilities, cell phone providers, and satellite companies all use credit to determine if you will be approved and if you need a deposit on the account. These higher costs are directly related to the amount of debt you carry.
Higher insurance costs. Car insurance companies, in particular, use credit as part of rate calculations. Insurance is a numbers game and they use any number that shows a correlation to your risk, which includes your credit score.
Less money for today’s needs. Debt payments take a portion of today’s income to pay for yesterday’s bills. When you think of a mortgage or car payment, the payment is working for today’s needs as well as yesterdays. You are able to enjoy your home and drive your car covering todays housing and transportation costs. Credit card debt, on the other hand, is generally for disposable items. Even if you are buying essentials like food or paying utility bills, they are expenses for yesterday’s expenses being paid with future dollars. When this becomes a pattern, it takes a toll on your cash flow and can result in serious financial problems down the road.
Additional stress comes when you are constantly worried about money. When only minimum payments are made or you are worried about the ability to keep up with payments, stress follows. You don’t have enough money going towards savings, upcoming college or retirement costs. This stress and anxiety can impact your health, your focus, and lead to other issues.
Debt accumulation can sneak up on you and become an issue overnight when a financial crisis hits. Whether you lose your job, have a health crisis, or experience a change in income, you may find yourself overwhelmed with too much debt to pay with today’s income. When this occurs getting help quickly will increase your options.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial for a FREE financial analysis today. Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high interest credit card debt any longer. Call (855) 250-8329 or get in touch with us by sending a message through our website here contact-us.