Debt really seems like a great idea at the time: You can make a purchase you might not otherwise be able to afford, and you can pay it off in small increments. Even though you are paying interest, it seems as though it is worth it, since you can have what you want now. Interest — paying someone else for the privilege of borrowing money — might be the most obvious cost associated with debt, there are other costs:
1. Lost Opportunity
Few of us think of the costs associated with lost opportunity. However, debt carries with it a lost opportunity cost. When you have to repay debt, with interest, you can’t direct your resources elsewhere. With debt hanging over you, you might not have the money to accomplish other goals, or take advantage of money opportunities that come in your way. This can cost far more in the future than the short-term gratification that comes with being able to buy something on credit immediately.
Consider: What if, instead of paying interest each month, you were able to invest the money in dividend paying stocks? You would be able to build up a portfolio over time that would allow you to create an income stream that would benefit you for years. The time you miss cannot be replaced. Instead of the opportunity to compound interest in your favor, you are instead paying compound interest.
2. Emotional Stress
Money can cause a great deal of emotional stress, and anxiety related to money is often strongest when associated with debt. Worry about paying down debt and how you will meet your obligations, can cause true emotional problems and fatigue. Not only that, but the emotional strains can cause difficulties in your relationships. It is hard to maintain good relations with your family and friends when anxiety and emotional stress are wearing you down. When constant debt is a worry, it can color aspects of your life, preventing your from sleeping enough and eating right — leading to health problems that can in turn cost more.
3. Your Credit
Carrying debt can also start to erode your credit rating. Indeed, if you have a high debt to income ratio, it will affect your credit score. If your debt problem becomes severe enough that you start paying late, and missing payments, your credit history will be affected further. It is vital that you consider the costs of having poor credit. A negative credit report can affect the following areas of your life and finances:
- Insurance premiums
- Ability to get a job
- Ability to buy a home
- Ability to buy a car
- Security deposit on a rental
- Service provider (cell phone and TV) transactions