Pros and cons: How debt affects your life

Debt isn’t a bad thing or a good thing. It’s simply a way to buy what you need or want now and pay for it over time. There is, however, some debt that you might like to get rid of sooner rather than later, and it’s important to know how to identify it.

Debt could improve your life

For some people, there’s a stigma around debt. It’s shameful, something to avoid. The truth is that debt is often a necessary part of our personal finance picture. 

Few of us could buy our first homes without mortgages. We may also borrow to purchase cars, get necessary medical care, get married, or take bucket-list trips. 

Debt sometimes helps us make more money. The right education could help us qualify for better careers and higher earnings over our lifetimes. Starting a business could help us provide for our families. These are examples of debts that many people use strategically to improve their standard of living.

The downside of debt

A person can have too much of a good thing. Balances creep up on us when we spend more than we earn. Debt can blow up suddenly when we experience a financial emergency like a job loss, divorce or illness. 

As balances grow, so does the cost of the debt, in the form of interest charges. And the more interest we have to pay, the less money we have for other things. Running short on money could force us into charging more purchases, driving our balances higher, and so on. It’s not hard to end up trapped in a vicious cycle through carelessness, sheer bad luck, or just what life brings us. 

How much debt is okay?

You probably know if you're managing debt well, but there are some objective indicators.

• Debt-to-income/DTI at 43% or lower indicates your debt and housing costs fit within your budget. 

• Average or higher-than-average credit scores mean you’re probably paying bills on time and keeping your credit card balances under control. 

• Balances that are stable or going down show that you’re managing your payments and making good progress. 

• Regular contributions to a retirement fund and emergency savings are very positive signs that your finances are in good shape. 

However, most people go through times when they carry more debt than they’d like, or can’t make every payment on time, or have to empty their savings in an emergency. You might be just starting out or going through a major change in your life. Or you’ve recently weathered a financial or personal hardship that is making it difficult to pay your bills. Or you’re just inexperienced in financial matters. 

Don’t worry. Remember that vicious cycle? There’s another cycle, too. A cycle in which you begin paying debt down. And every month, as your balances get lower, interest charges can drop, freeing up more money to pay down more debt, and so on. That’s called a virtuous cycle, and it’s life-changing. 

Getting to okay: You’ve got this!

There are many ways to shrink debt balances, and at least one is right for you. Take a look at how much excess debt you’ve got and how much income you have available to pay it down. Then make a plan. 

Maybe you just need to create a budget or to take the one you have a bit more seriously. Look for ways to cut back and take a bite out of your debt (the sacrifices don’t have to be forever). Perhaps the solution is taking on more hours at work or finding a side gig or even a new job. The debt avalanche and debt snowball methods are popular, effective ways to demolish your balances over time. Achieve’s GOOD app for getting out of debt, and MoLO app for finding more money left over in your budget, can add fuel to your fire and help you torch debt even faster. 

It might help to restructure your debt. A debt consolidation loan could be helpful if you can get a lower interest rate than you’re currently paying. Then speed up your repayment until you’re at a debt level you’re comfortable with. A consolidation loan isn’t the only possible strategy. Other options include negotiating with creditors (yourself or through a professional debt resolution company), a debt management plan through a certified credit counselor, or even bankruptcy. Talking to a debt expert could help clarify what path might be right for you.

Recommended: Debt solutions: Understanding your options

The main message here is that debt can be good and that debt problems are solvable. You can tackle your debt and move on, and it feels great to know that you’re in charge of your financial destiny.