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These days, it’s not uncommon to owe thousands of dollars to a mortgage servicer, student loan company, or credit card issuer. However, while there is nothing wrong with having debt, it’s important to keep it in check. Whether it’s working with a credit counsellor or taking a second job, let’s take a closer look at why you need to prevent debt balances from climbing higher than they are right now.
Table of Contents
1- Interest Payments Can Dominate Your Budget
As your debt balances climb higher, you’ll owe more in interest to your lenders. Depending on your interest rate, you may find that most or all of your payment is actually going to interest while little goes toward the principal balance. Ultimately, you could be spending thousands of dollars making your lenders rich that could have gone toward your retirement fund, rainy day fund, or some other purpose.
2- Your Credit Profile Will Suffer
Making the minimum payment on your debts each month will typically allow you to maintain a relatively high credit score. However, if your debt-to-income ratio is too high, you may find it difficult to get a loan regardless of that fact. Therefore, it may be difficult or impossible to buy a car, get an apartment, or handle any other financial emergencies that might arise.
3- You Could Have Your Wages Garnished
If you fail to make payments to your creditors, you could have your paycheck garnished or assets seized. There is also a chance that bank accounts will be levied with little or no warning to pay balances in arrears. In addition, you’ll likely pay penalties and fees on top of the interest that will continue to accrue on a debt that you’re not current on. Depending on where you live, creditors may be able to attach liens to cars, homes, or other property, which can make it difficult or impossible to sell because you won’t have a clear title to those items.
4- Bankruptcy Isn’t a Magic Reset Button
While bankruptcy can clear some of your debts, it cannot clear student loan balances or some back tax balances. It also can’t help you get rid of back child support or other priority balances that you owe. Even if your balances can be discharged, you may be required to make payments over a period of three or five years if a court finds that you have the means to do so.
Regardless of whether you qualify for Chapter 7 or Chapter 13 bankruptcy, it will stay on your credit report for at least seven years, which can make it harder to get credit. It can also make it harder to get a job, an apartment, or even an affordable insurance policy.
The sooner that you can pay down your debts, the sooner you can start to secure your financial future. Debt consolidation, negotiating with creditors, or selling assets that have positive equity may help to reduce your debt balances and monthly payments. A financial adviser may be able to help you create a budget or learn other relatively easy methods of better managing your money.
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