The Hidden Dangers of Debt and How to Avoid Them

Debt is an unfortunate reality for millions.

According to a recent Federal Reserve Bank of New York report, total household debt rose to a staggering $15.2 trillion in the third quarter of 2022. And that includes everything from mortgages and student loans to credit cards and auto loans.

Credit card balances alone totaled $974 billion in the same period, while student loan debt stood at a staggering record-high of $1.69 trillion. Delinquency rates on student loans also increased, with 8.4 percent of student loan balances being 90-plus days delinquent or in default. Meanwhile, more than 6 percent of auto loan balances were also 90-plus days past due.

These statistics highlight the significant risks associated with debt and the importance of taking proactive steps to manage it. 

The problem is that you might not fully comprehend the multifaceted risks of debt until it’s too late. These hidden dangers can significantly impact your financial and mental health.

High-interest rates, for instance, can impede your financial flexibility and limit your buying power, further compounding debt woes. Damage to your credit score can also have serious ramifications, hindering your ability to obtain credit or loans in the future. 

And beyond financial repercussions, the emotional toll of debt can also strain personal relationships and even have physical health consequences. 

Recognizing these hidden dangers is critical, and taking proactive steps to mitigate them is essential.

Financial Dangers of Debt

Debt can pose significant financial risks, some of which could have long-term consequences if left unattended. Some of the most prominent financial dangers include:

• High-interest rates: When you carry a balance on a credit card, for example, you may end up paying interest rates as high as 20 percent or more.
• Damage to credit score: Late or missed payments lowers your credit score, which can also impact things like insurance rates, rental applications, and even job opportunities.
• Reduced buying power: When you’re paying off debt, you may have to cut back on other expenses or delay purchases until you’ve paid everything off.
• Limited employment opportunities: Some employers require a credit check for hiring. A low credit score could be a big red flag.

Those, of course, are practical consequences. You may face legal action, such as wage garnishment or even bankruptcy as two examples if you’re unable to keep up with your payments, 

Finally, debt limits your financial flexibility. Without the freedom to adjust your financial situation, you may feel trapped in a cycle of debt that’s hard to escape.

Non-Financial Dangers of Debt

And that segues into the non-financial dangers. Simply put, debt can take a toll on your mental and physical health and strain personal relationships.

Start with the emotional toll. Worrying about debt and managing multiple payments can cause stress, anxiety, and depression. It can also affect your sleep.

Debt can also strain personal relationships and have a negative impact on physical health. Studies have shown that people with high debt levels are more likely to experience physical health problems such as headaches, back pain, and stomach problems.

In fact, the non-financial risks are just as real and impactful as the financial ones. Some ways to manage the stress of debt include:

• Seek out support: You can discuss your financial situation with the Van Horn Law Group, which specializes in debt relief solutions, or a debt-relief institution. Just knowing where you stand can feel like a weight has been lifted off your shoulder.
• Consider a side hustle: If the global pandemic taught us anything, it’s that you should always have a secondary source of income, like a side hustle or freelance work. This will help you pay off your debts faster, plus you never know when you’ll need that extra cash – emergencies don’t care about your debt situation.
• Celebrate small victories: Paying off a credit card or reaching a debt reduction milestone should be celebrated. It’s a big deal – but don’t celebrate by spending unnecessary money on something you don’t need!

5 Tips for Avoiding Debt

Effectively managing debt is no doubt challenging and should be considered a marathon, not a sprint. But it’s also crucial for avoiding the hidden dangers that come with it. Here are some practical tips to avoid falling behind on your financial obligations:

1. Create a detailed budget of your expenses: Are you sure you know exactly where all your money is going? It’s time to create a budget so that you can accurately track your income and expenses. Now you know what areas to reduce your spending and where you can allocate at least some of that money towards paying off your debt.
2. Prioritize debt payments: Look for all your high-interest debts like credit card balances and pay those off first. Can’t make those payments in full? Instead, pay more than the minimum, as that will reduce the interest you pay over time.
3. Seek financial help: Consider reaching out to a financial advisor or credit counselor. They can provide guidance on how to reduce your debt and create a plan for managing your finances.
4. Debt consolidation or bankruptcy is a last resort!: These should be viewed as last-resort options and only pursued after considering all other options. The reason? Bankruptcy can have a relatively long-lasting impact on your credit score and overall financial health. Then there’s debt consolidation, in which you face unexpected fees and risk losing any collateral you put up. And, while the promise of lower interest rates always sounds appealing, the fact is there’s no guarantee you will receive a rate low enough to justify the move. Like bankruptcy, consolidation can also hurt your credit score.
5. Practice self-care and stress management: Stress takes a toll on your well-being. That’s why you still need to prioritize self-care activities. Exercise. Meditate. Play with the dog. Spend time with family and friends. Just remember, the more stressed-out you are, the less likely you are to view things critically and clearly.

By taking proactive steps to avoid the hidden risks of debt, you can improve your financial and mental health and avoid long-term consequences.

Seek out help, create a plan, and prioritize your financial and mental well-being. Connect with us today at the Van Horn Law Group to help you get back on track with your mounting debt.