March 2, 2014 ?? – Four letter words can ruin a lot of things in life – a nice family dinner, a job interview, your relationship with your mother. But there is a four letter word that can wreak such havoc in your life that you won’t be able to live in the place you want, drive the car you prefer, or even get the cell phone plan you love.
This word is debt.
Debt is the epitome of the American experience these days: most people take it out at age 18 (or even younger) in the form of student loans; we use it to buy cars, which depreciate almost immediately; it underlies, for better and sometimes for worse, our real estate market; and, increasingly, Americans are taking on credit card debt to fill gaps in their budgets and even just make purchases.
All in all, the average American today owes about $ 225,000 in debt, in a country where the median household income is just just over $ 53,000. Average credit card debt alone, for those who carry it, is over $ 15,000.
While access to credit allows us to take on this kind of debt, it hinders our ability to access more credit. Therefore, the big screen TV you buy today just might be the only thing stopping you from getting a mortgage on the perfect home. Next year.
A thousand cuts
Emily Gould’s big essay on Medium this week highlights how easy it can be to generate life-changing debt with just a few small (but daily) decisions. In her case, she quit a full-time job to write a book, but did not give up the expenses that the full-time job had allowed: she kept an apartment on her own longer than she could afford. allow, kept her coffee -and the habit of bottled water until, by her own admission, she didn’t have the money to buy it and even continued to see a therapist who didn’t did not accept insurance until she owed almost $ 2,000 to her own doctor.
Gould isn’t alone in many of her choices: talking to anyone who’s been in massive debt, and it was rarely a single big purchase (though often a massive medical expense, which is. one of the reasons it was smart for Gould to continue paying for his own health insurance). Instead, debt typically builds up in hundreds of small increments, followed by escalating interest payments and even more debt accumulating, until the credit card companies cut you off and the collectors are starting to call.
What Gould doesn’t mention is that accumulating debt can have implications far beyond the blow to self-esteem and feelings of security. Debt has a direct impact on your credit rating (and your perceived creditworthiness), and increasingly, a bad credit rating can impact your life in a variety of unexpected ways.
Want to rent a new room? A bad credit rating can prevent a landlord from offering you a lease. Want to buy a house or an apartment? A bad credit score can prevent you from qualifying for a mortgage or dramatically increase the interest rate offered to you. Are you looking for a new car? Your bad credit rating will certainly hamper your ability to get a cheap car loan and may even prevent you from lowering your insurance rate.
The impact of your debt-related credit score does not end there. Your utility might require you to pay a deposit to turn on the electricity if your credit is bad. A cell phone company might do the same – or refuse to offer you a two-year contract with a cheap cell phone plan.
Faced with reality
So what can you do if you are already in debt? First, check your credit reports, which are free every year on the federally authorized website AnnualCreditReport.com, make sure you understand what you owe, and correct any mistakes. You may also want to consider a free service, like the credit report card offered by my business Credit.com, which updates your credit scores every month.
Second, start paying off that debt, regardless of the daily sacrifices you have to make. There are different schools of thought when it comes to debt reduction and each has its pros and cons, but pick one and get started.
Finally, make a plan for when you are finally debt free: Identify the spending behaviors behind your debt, and make sure you don’t fall back into bad habits. There’s no point in getting out of debt to improve your credit score, only to turn around and scuttle all your hard work because you miss that daily latte.
While talking about your debt in good company isn’t as likely to raise as many eyebrows as some other four-letter words we all know, it’s the word that’s most likely to have lasting consequences in your life. So make sure you use debt as wisely and wisely as an f-bomb – sparingly, and only when it really matters to what you want to accomplish.
Adam levin is president and co-founder of Credit.com and 911 identity theft. His experience as a former director of the New Jersey Consumer Division gives him a unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity and credit theft.