Negative Effects of Debt

Large amounts of debt do not automatically equate to bad credit. There are many individuals (and families) who carry extremely high levels of debt yet they faithfully pay their creditors each month. Although, these people are severely overburdened financially they often possess a very good credit score. Does this imply that their debt has no negative financial affects: absolutely not.

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There are several negative side affects that are brought about by excessive debt.

Stuck on minimum payments. High debt loads often make it impossible to make much more than the minimum payments.

Difficult to lessen debt. Once an individual has reached the level of paying only the minimum it is very difficult to reduce the debt amount. Minimum payments generally cover little more than accrued interest. This creates a scenario where someone could continue to pay their creditors indefinitely.

Credit card companies look heavily at credit scores. Often times a person who can only afford to make minimum payments will choose to apply for more credit in order to temporarily gain some financial relief. Generally credit card companies do not consider levels of debt. If they meet the necessary income requirements and credit scores they will probably issue them more credit. This places the individual in a deeper financial hole and increases the chance of bad credit in the future.

Bad debt to income ratio. This ratio is determined by taking your monthly minimum debt payments and dividing by the total amount of monthly income. Income would include salary, commissions, bonuses, etc. The higher this ratio is the less likely that you would be approved for a home mortgage or a car loan.

Many people are under the impression that as long as they can maintain their minimum payment obligations then they are financially stable. This simply is not the case. In the long run high levels of debt greatly increase the chances that you will experience credit problems in the future. In the short run you will possess a very poor debt to income ratio which can make it extremely difficult to obtain a new house or car. If you do manage to obtain a loan the interest rate will almost certainly be higher.

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About the author:

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt management services nationwide.