Even though most Americans live saddled with at least some debt, being in debt is not advantageous in general. Debt carries with it multiple problems, some of which may linger with you for years. Eliminating these problems usually means eliminating the debt, which is not always easy, depending on your situation. It usually takes time to make the problems associated with your debt go away.
Credit
Lenders are highly concerned with your ability to pay back a debt. This is simply a matter of profit and revenue--they want to know whether you are going to be a liability and cost them money. To test the risk they're taking on by lending to you, creditors assess your debt-to-income ratio. The more debt you have, the less likely it is that you can take on additional loans because a higher percentage of your income will go toward repayments. Additionally, because debts may last for years, your credit can be tied up for long periods. It's therefore better to have as little debt as possible because lenders will offer you more in terms of credit due to the lower debt-to-income ratio, and because you can apply for the additional loans you truly need sooner.
Budgeting Repayment
Each payment you make on debts every month ideally should be included as an expenditure within your budget. Increases in debt do not always happen in conjunction with increases in income--in fact the opposite is more often true, with people taking on debt because their incomes are not sufficient to meet all needs. With more debt, your discretionary income decreases, making it much harder to save money or pursue the interests that make you happy. Taking on debt also means that your budget will be more complex and that you likely will have to spend more time dealing with your finances.
Fees
Debts come at a literal price. Creditors almost always tack on some kind of fees when they loan you funds. The most common fee is interest. Others include late charges, over-the-limit fees and charges for early termination, transferring balances and refinancing. You may have fees associated with disputing what you owe or correcting information on your credit score. There also are fees for defending yourself in court against creditors. These fees simply decrease your available revenue, making your financial situation even more dire.
Transfer of Liability
In America, there are community property and separate property states. In a community property state, your spouse may be held liable for some or all of the debt you have because the government sees you and your spouse as one economic unit. Each person is responsible for his own debt in separate property states in most cases, but there are some exceptions, such as if you co-signed on a loan. In other words, by taking on debt, you may cause financial hardship for others, depending on your situation and your jurisdiction.
Loss of Inheritance
When you have debt, if you pass away, creditors have a right to make a claim against your estate, although there sometimes isn't enough worth in the estate to pay all creditors. This means that there may be less assets available for your heirs, which makes it more difficult to offer loved ones financial help for the future.
Stress
Debt creates stress. Creditors may call or write to you to demand payment, and you may worry about how you are going to make your payments. This stress can carry over into other areas of your life as well, affecting things like personal relationships and work productivity. You often can find some relief from stress through the Fair Credit Collection Practices Act, which prohibits harassment from creditors.
Solutions to Debt Problems
Because debt renders so many issues, debt counseling can be beneficial. Debt counseling shows you the best route to debt repayment and often reveals budget techniques that will work for your situation. You also may write to your creditors to ask for lower interest rates or forgiveness on a portion of the debt. Consolidating debt sometimes helps by lowering interest or reducing the amount of time you will owe. Tracking expenses, however, is by far the best key to removing debt. Tracking expenses shows you where funds are leaking out of accounts and provides clues as to what you have prioritized financially. This, in turn, indicates how you can reduce spending and make better purchase choices.
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