For most people, making a major purchase like a car or home means taking on a certain amount of debt. Unless you're able to earn scholarships or save for your education, college typically requires student loans. While these types of debt are considered "good" debt, people too often end up incurring "bad" debt, such as credit cards or personal loans. Before going into debt, it's important to consider its potentially negative consequences.
Impact on Your Credit
Being in debt can lower your credit score. This may limit your ability to obtain new credit, or cause you to pay higher interest rates. According to myFICO, 30 percent of your credit score depends on the amount of debt you owe, while an additional 10 percent depends on the types of debt you have. If lenders see that you owe a large amount of debt on multiple lines of credit, they may consider you a bad financial risk and refuse to extend you credit. If your debt is so extreme that you must declare bankruptcy, this can ruin your credit for up to 10 years.
Psychological and Physical Effects
Being in debt can affect your mental and emotional well-being. It can place a strain on your relationships (e.g., if you owe money to a friend or relative, or are constantly arguing about household finances with family members). According to the Federal Reserve Bank of San Francisco, being in debt can lead to depression, anxiety and stress. And if you focus too much of your attention on your debt, you may find yourself neglecting good eating, sleeping and exercise habits, which may increase your risk for heart disease or diabetes.
Lifestyle Limitations
Being in debt limits your lifestyle choices. For example, you may hate your job, but feel that you are unable to make a career change because of your debt. If you're in debt, all your extra money typically goes to your creditors, preventing you from doing things you enjoy. Being in debt can also negatively impact your future by making it difficult or impossible to save for things like retirement or your children's education.
Legal Implications
Your debt can potentially lead to serious legal problems. For instance, if you are behind on your credit card payments, your creditors can sue you in civil court to recover what you owe. In some states, creditors can garnish your wages or seize your bank accounts to satisfy a judgment. If you own a home and are delinquent on your payments, the bank can initiate a foreclosure proceeding. If a foreclosure occurs, you not only lose your home, but you may still be liable for the difference if your home sells for less than the total amount you owe.
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