The Effects of Personal Debt

A limited amount of personal debt is beneficial. It helps your credit score by demonstrating that you are capable of responsibly handing debt; therefore, it's important to use your credit scores and have a mix of installment revolving loans. However, when you carry high balances, your debt begins to negatively affect your life in a number of ways.

Credit Score

Roughly one-third of your credit score is calculated based on your current debt load. When you're carrying a lot of high balances in comparison to the amount of credit available to you, your credit score suffers. With a low credit score, you may have problems obtaining new credit, qualifying for a rental home and even landing a new job. To boost your credit score, it's vital to get your debt below 25 percent of the amount of credit available to you, according to the Better Business Bureau.

Obtaining New Credit

When lenders see that you've had a hard time managing your finances, they may be wary of lending you money. If carry a lot of personal debt but you do qualify for a loan, it's unlikely that you will qualify for the best interest rates. This means that you end up paying significantly more for the money you borrow, particularly for large loans like mortgages and car loans.

Saving

When you accumulate a lot of personal debt, it may be difficult to contribute to an emergency fund or to saving for big-ticket items. When you only pay the minimum on a credit card, you end up paying much more than what you borrowed, all of which could be contributed to savings. For example, a card with a $5,000 balance at an interest rate of 18 percent with a minimum payment calculated by interest plus one percent of the balance will end up with a $125 monthly minimum payment. It will take 62 months---more to ---to pay that card off with minimum payments. That's $7,750 total, meaning you've spent $2,750 just to keep that balance sitting there when you could use it for a vacation or to save for a new home.

Considerations

Carrying a lot of personal debt doesn't do you any favors; it just contributes to a cycle of debt in which it may feel like your bank account is a sieve. If you're struggling to make payments, it may be time to get in touch with a credit counselor. The National Foundation for Credit Counseling website will allow you to search for a trustworthy credit counseling organization near to you. A credit counselor will help you to create a budget and present you with several different debt payment solutions, such as payment plans to get out of debt on your own, debt consolidation, a debt management plan or even bankruptcy. Getting the input of a trained professional is helpful in making the right decision about what to do with your debt (see Resources).