The American people are drowning in credit debt, possessing a record $957.2 billion in credit card debt at the end of 2007, according to the Federal Reserve. Consumer debt of $11,000 to $12,000 an average household is unheard of. The scary part of the statistic is that the figures are diluted by households that don’t hold any debt. Households that carry over their debt monthly have an average $17,000 in unsecured debt.
Currently, one out of every five households is either late on their payments or has exceeded their credit limit at least once. But these statistics can never reflect the real cost of credit card debt.
When people have bad debt they mainly see the tangible costs of the debt, what they see printed on their statements every month. But people dont examine the intangible cost of debt, opportunity cost. What does that mean? Opportunity costs as they relate to debt are, the opportunities you are forgoing due to debt. The opportunities you forgo are the intangible costs associated with your consumer debt.
The money that goes towards paying off and financing your debt could be used for several things:
Saving Building you wealth through investing Saving for your childrens college tuition Paying for a vacation Down payment for a house Emergency fund Saving for retirement
As you can see the above lists some important lost opportunity costs of maintaining debt.
Costs of Bad Credit Scores
The credit score is key to maintaining financial independence. Good credit scores and credit reports provide great currency for getting preferential treatment in areas of finance, employment, and many others. If you are seeking employment, your credit score can be of huge of influence of you being hired or not.
Employers do perform credit checks to determine if you are a responsible person; a good credit score reflects that. By extrapolating from your FICO score, employers can formulate certain judgments about you that can affect your employment.
Additionally, your credit history affects other aspects of your life. Your financial picture can be improved or reduced depending on your credit report and credit score. A good credit score can save you thousands of dollars in interest rates on your mortgage loan, car loan, business loan, personal loan, or credit card.
It is important to understand long-term consequences of bad credit debt in your life, it is the only way to keep a balanced approach towards credit use, use it with care. Dont let the high interest credit cards take over and give away your financial independence to credit card companies.