This helpful look at debt is a guest post from the team at InvestmentZen. As cost of living rises, leaving behind the slower rise of median income, many people have turned to credit cards and personal loans to make ends meet. In the short term, this approach can help, but it holds significant hazards over the long-term. Particularly with interest rates rising to alarming levels, allowing debt to accumulate can bring disaster to a financial plan.
Some debt is impossible to avoid, such as mounting medical bills after a major illness or injury. Very few people have the resources, even if insured, to handle the staggering medical costs of something like cancer or a major surgery. As with most debt, fees and interest can accrue rapidly, even if minimum payments are being regularly made. If a payment does get missed on nearly any form of debt, it can cause interest rates to launch to astronomical rates, sometimes as high as 30%.
A strong financial plan with a good budget remains key to planning for the future, and paying off debt as quickly as possible becomes vital to the financial hopes of any family. Utilizing credit wisely can actually help, however, creating a strong credit score that can lower interest rates and fees dramatically. It can also allow for the purchase of things otherwise out of reach of most budgets, such as a new home or an education. As such, taking advantage of certain opportunities, even if it means a degree of debt, can be beneficial.
Some credit cards offer great perks, and can be used wisely to help build a strong credit score, which can reduce interest rates on new debt, such as a mortgage. Even a fractionally lower interest rate on a debt as large as a mortgage can save tens of thousands of dollars over the life of the loan.
The data below not only shows how your household compares on a national level, but it provides several tips on how to improve your long-term financial situation as it pertains to debt.