The Hidden Costs of Debt (And How to Break Up With It)

Debt is an almost inescapable companion in the modern financial landscape. The financial burdens that come with it are obvious, but the unexpected costs of debt can sneak up on you, creating chaos in your life. In this article, we delve into the three hidden costs of debt, exploring how it can cause financial turmoil, take a toll on your emotions, and limit your options for the future. But don’t worry; we don’t just highlight the challenges – we provide solutions. Here’s a deep dive into the hidden costs of debt (and how to break up with it). 

3 Hidden Costs of Debt

1. It Can Cause Financial Distress

Debt, if left unchecked, can set off a chain reaction of financial challenges. The domino effect of missed payments, accumulating late fees, and the looming threat to your credit score can create significant financial turmoil. 

Debt has steadily increased among American households over the past several years.  A recent report found that during the third quarter of last year, the average American household carries $103,358 in debt. This is 11% higher than the average household debt in 2020. 

2. It Can Wreak Havoc on Your Emotions

The financial burden of debt can take a serious toll on your emotional well-being. The constant stress and pressure to repay debts can strain relationships, lead to personal anxiety or depression, and even affect your physical health.

Forbes Advisor conducted a survey that revealed 54% of adults said they always or often feel stressed out by their debt. The same survey showed that 60% of respondents say their debt led to disagreements in their relationships, and 48% experienced sleep problems because of their debt. The emotional toll of debt can have a cascading effect on your overall quality of life, making it imperative to address not just the financial aspects but also the emotional well-being tied to debt.

3. It Can Limit Your Options

Debt isn’t merely a burden; it can restrict your ability to pursue important life goals and experiences. Whether it’s your dream of starting a business, traveling, or simply saving for a comfortable retirement, debt can put these goals on hold. Breaking free from debt is not just about freeing up extra cash; it’s about reclaiming the freedom to meet your goals and build the life you desire.

How to Help Eliminate Debt

Financial Coaching

You don’t have to navigate your journey to financial freedom alone. Seeking the guidance of a financial coach can provide personalized assistance in developing a robust debt repayment plan. Financial coaches specialize in helping you create realistic budgets, identify and plug spending leaks, and even negotiate debt settlements. Credit & Debt® offers free financial coaching services, equipping you with expert guidance tailored to your financial situation and paving the way for a debt-free future.

AI Financial Tools

In the digital age, leveraging technology is transformational in controlling your finances. Tools that leverage artificial intelligence technology, like budgeting apps, debt-tracking software, and automated savings apps, can help streamline your financial journey. 

The Credit & Debt Money Sensei® tool offers invaluable insights and task automation, ensuring you stay on track toward your debt elimination goals. Use the app to sync all your accounts to visualize your income and expenses, receive real-time financial alerts on account activity, and use DIY tools like the Debt Payoff Simulator. These tools empower you to make informed financial decisions, creating a pathway to a financially free future.

Spend Your Tax Refund Wisely

As tax season approaches, consider putting your tax refund toward your debt repayment. A lump sum payment from your tax return can significantly reduce your overall debt balance and shorten your repayment timeline. 

With Credit & Debt features like Money Sensei Insights, you can receive alerts as soon as your tax refund is deposited, helping you make informed decisions. The Debt Payoff Simulator tool helps you analyze different credit card or loan approaches to maximize savings, calculating new monthly payments and overall savings.

FAQs: The Hidden Costs of Debt

What types of debt are considered “bad”? 

Some forms of debt can have more detrimental effects on your financial health than others. Generally, high-interest debt, such as credit cards or payday loans, is considered “bad” because it can snowball and negatively impact your finances. 

The exorbitant interest rates associated with these forms of debt can lead to a vicious cycle of increasing balances. However, it’s essential to note that individual circumstances can influence the answer. Seeking professional advice can provide personalized insights tailored to your unique situation.

How much debt is considered too much?

Defining “too much” debt is not a one-size-fits-all approach. Several factors, including income, living expenses, and credit score, come into play. As a general rule of thumb, it’s advisable to keep your debt-to-income ratio below 43%. This ratio provides a holistic view of your ability to manage debt relative to your income. 

Is it better to save or pay off debt first?

Deciding between saving or paying off debt depends on your financial situation and the interest rates involved. If you’re struggling with high-interest debt, such as credit cards, prioritizing repayment might be wise. The interest accrued on these debts can often outpace the returns you’d earn from savings. However, maintaining an emergency fund is crucial for unforeseen expenses and peace of mind. 

For credit card debt, strategic solutions like a balance transfer, offered by Credit & Debt, can consolidate your debt, pausing interest payments for an extended period – up to 18 months. This dual approach allows you to tackle debt efficiently while still building a financial safety net.

How much does financial coaching cost?

Financial coaching through the Credit & Debt app is completely free of cost. Your financial coach is ready to guide you through the intricacies of your financial landscape, providing a personalized action plan, resources, and ongoing support. 

Whether you’re seeking advice on optimizing your credit card choices or aiming to alleviate burdensome debt, your coach is there for you. There’s no need to navigate complex financial decisions alone. With the Credit & Debt app, you can rely on expert guidance without worrying about the cost. 

Which AI financial tools are best for beginners?

Navigating the realm of financial tools can be overwhelming, especially for beginners. When seeking AI-driven solutions, it’s crucial to choose tools that are easy to understand and user-friendly.

The Credit & Debt Money Sensei technology is an excellent choice for beginners. This tool provides straightforward and essential metrics such as income versus expenses, monthly spending, and spending by category. Its insightful features keep you proactive, allowing for easy and category-specific budgeting. With Money Sensei, beginners can confidently take the first steps towards financial empowerment.

How much of my tax refund should I allocate toward debt?

Determining the optimal allocation of your tax refund towards debt requires a thoughtful approach. Consider factors such as your remaining debt balance, existing interest rates, and overall financial goals. While allocating a significant portion toward debt repayment is tempting, protecting your savings is crucial. 

Bottom Line

The impact of debt extends far beyond numbers on a balance sheet. The financial turmoil, emotional strain, and limitations on life goals point to the urgency of addressing and eliminating debt. Fortunately, armed with the right tools and strategies, you can break up with your debt.

Financial coaching, as offered by Credit & Debt, provides a personalized roadmap to navigate the complexities of debt repayment. The integration of AI-driven tools, like Money Sensei, helps provide informed decision-making and a proactive approach to managing your finances. Download the Credit & Debt app for free to get your debt breakup started! 

Credit & Debt does not provide debt relief or loans and is not a lender. A Credit & Debt coach will guide you through a free financial evaluation, help you understand your options and connect you with a qualified partner.