11 Dangers of Debt and How To Avoid Them
Whether you are currently in debt or are considering taking on debt, it is important to understand the potential dangers. The reality is that debt can have a big impact on all aspects of your life.
From making it easy to overspend to impacting your mental health to hurting your credit score and more, let’s take a closer look at the dangers of debt.
What Are the Dangers of Debt?
If you are thinking about taking on debt, you need to be aware of all the possible ramifications. This can help you make an informed decision on whether or not to go into debt.
Here are the biggest concerns that you should keep in mind.
1. Debt Makes It Easy to Overspend
When you can turn to your credit card to fund an expense, it’s easier to overspend. After all, the purchase amount is not coming directly out of your checking account.
In many cases, credit cards will offer you a higher credit limit than you can actually afford. For example, let’s say you have a $10,000 credit limit but can only afford to spend $1,000. You’d have the ability to overspend by $9,000.
Although it is easy to say that you can resist this temptation, it can be more difficult in the moment. When an impulse purchase is within reach, swiping your credit card is dangerously easy to do.
2. Debt Can Impact Your Mental Health
Studies have found that debt can cause mental health issues. Some people feel depressed or overwhelmed by their debt. Others may experience embarrassment. Regardless, these emotions do not enhance your quality of life.
No matter how much debt you have, the idea of debt hanging over your shoulder is an anxiety-inducing experience. You’ll always have to consider how your choices affect your debt.
Beyond that, the process of eliminating debt is not easy. It can be a difficult and emotional journey that takes a substantial amount of time.
3. Debt Costs More Than Paying in Cash
When you take out a loan to fund a purchase, you agree to pay interest on the loan. Consequently, the interest payments will increase the total cost of your purchase.
Anytime you take on debt with an interest rate attached, factor the interest payments into the total cost. You might be surprised how quickly a small purchase can add up due to high interest rates.
4. Debt Leaves You Without a Safety Net
If you have debt in your life, then you likely don’t have a safety net. Even though you might be able to afford the monthly payments, what happens if you miss a paycheck or lose your job? Will you have enough funds to cover your debt payments and other living expenses?
Typically, the answer is no. Debt can leave you on the edge of a financial cliff without much financial security to fall back on.
5. Debt Takes Away Your Choices
When you are in debt, you have to make monthly payments. Depending on the size of your debt, this could account for a sizable portion of your budget.
Minimum monthly payments take a bite out of your budget, so you’ll find yourself lacking the freedom to live your life on your own terms. Choices like changing careers, taking time off, or making purchases you truly value will come second to your debt repayments.
6. Debt Can Strain Your Relationships
Bringing money into a relationship is a recipe for disaster and discomfort. Think about times you’ve seen family members or friends loan each other money. Has it ever worked out well?
Beyond family and friends, debt can put a strain on your romantic relationships. It can be especially challenging to manage debt in a marriage. With two opinions on how to tackle the problem and different emotions about money flying around, it can create friction.
7. Debt Can Harm Your Credit Score
Managing your debt irresponsibly can harm your credit score. If you want to take on any loans in the future, such as a mortgage, then a good credit score is critical. But taking on too much debt and mismanaging it can lead to unfortunate consequences for your credit score.
Having a lower credit score means you’ll pay higher interest rates on any loans you may need. Bad credit scores can even impact your insurance rates.
Related: The Credit Score Jumpstart Project
8. Debt Leads to a Lower Net Worth
When you want to build long-term wealth, your net worth is an important number. To calculate your net worth, you subtract your assets from your liabilities. Here’s the formula:
Assets – Liabilities = Net Worth
Debts fall into the liabilities category. When you are in debt, your net worth will decrease.
9. You’ll Have to Repay It Eventually
You likely have the opportunity to take on debt regularly. Swiping your credit card to make a purchase you cannot afford or taking out a personal loan to fund a major expense allows you to enjoy a reward in the present.
However, you will have to repay your debt at some point. Take that into consideration the next time you make a purchase you can’t immediately pay off.
10. Your Lifestyle May Be Inflated Beyond Your Long-Term Means
When you take on debt to make ends meet, you are essentially living beyond your means. Although it may feel like a temporary measure, it could become a long-term trend.
If you are too comfortable taking on more debt, then you might continue taking on debt to support lifestyle inflation that you cannot afford. This makes it even harder to get out of debt because you continue to dig yourself into a deeper hole.
11. Debt Can Force You to Make Messy Financial Choices
Debt can lead to a messy financial picture. Not only will you have a debt to pay off, but you might be forced into less than ideal financial choices.
For example, at some point, you might have to borrow from one lender to repay another.
Needless to say, the idea of taking on more debt to repay old debts can get messy quickly.
How To Avoid The Dangers Of Debt
It’s essential to understand the dangers of debt, but it’s also vital to know how to avoid them. In today’s world, the ability to take on a little bit of debt here and there can be all too tempting.
Fortunately, there are a few tried and true strategies to help you avoid debt.
1. Remember Your Priorities
Keep in mind what is important to you. Think about what you value most. You’ll likely find that you value your freedom and autonomy over the short-term gratification of debt.
2. Live Within Your Means
Take a close look at your income and make the conscious choice to live within your means. Although you can easily access debt to inflate your lifestyle, choose to live within your means.
Creating a budget can help with this. By understanding how much money you have coming in each month and how much you have to spend on necessities, you can avoid making purchases that will lead to debt.
3. Acknowledge the Benefits of Financial Freedom
Consider how financial freedom could change your life. What could you do with your money instead of making a monthly debt payment? Maybe you can take a dream vacation or explore a hobby that interests you.
Find a way to prioritize your financial freedom over taking on more debt.
4. Pay Off Debt with Undebt.it
If you are already in debt and want to avoid continuing to deal with the dangers associated with it, Undebt.it can help. With seven different payoff strategies to choose from, you’ll be on the road to eliminating your debt in no time since you’ll be able to find a repayment method that works for you.
The Bottom Line
Taking on debt can be a dangerous decision. If possible, try to avoid it so that your financial health stays intact.
Are you stuck in debt? Undebt.it is here to help! You can explore debt repayment plans to find the perfect fit.