Debt is a common fact of life in America today. According to a 2015 report from the Pew Charitable Trusts, roughly eight out of ten Americans have debts, with an average of $67,900 per person. The report also found that Americans feel conflicted about their debt. Nearly 70% of respondents said they would rather not have debt, but they see it as a necessity – and a similar percentage feel that loans and credit cards have given them more opportunities in life.
These conflicted feelings reflect the fact that debt can be both good and bad. Good debt is a useful financial tool, helping you to do things that will improve your finances in the long run – such as going to college, buying a home, or building a business. By contrast, bad debt, such as credit card debt, just weighs you down with interest payments while doing nothing to increase your income. This, in turn, makes you more dependent on borrowing to get through the month, trapping you in an endless cycle of debt.
Being stuck in a debt trap ties up your money so you can’t do all the things you’d like to do with it. However, its effects are far more than just financial. Over time, the constant pressure of debt can also damage your work, health, and relationships. Freeing yourself from debt can make your life better in just about every way.
1. More Free Income
When you’re carrying a lot of debt, the payments on that debt tie up a big chunk of your income. For instance, suppose you have a 30-year mortgage for $200,000 at 4.5% interest. The payments on that mortgage will eat up $1,013 of your income each and every month – and nearly half of that will go toward interest, not building actual equity in the house.
If you can find a way to pay off that debt early, suddenly you’ll have more than $1,000 of extra income available every month. That’s more than $12,000 each year that you could spend on all the things that matter to you. You could treat yourself to that kitchen remodel you’ve always dreamed about, devote more money to your favorite hobby, or go on a fabulous vacation each year.
2. Earlier Retirement
Another thing to do with the extra money you save by paying off your debt is to put it into investments. If you’re not putting enough into your retirement accounts right now, that extra cash could mean the difference between retiring at 65 or having to work into your golden years. And, if you’re already maxing out your retirement contributions, putting the money into other investments could help you reach financial independence and be able to stop working even earlier.
3. Less Risk
One of the worst things about being in debt is the risk it brings into your life. If you’re already in debt and have no emergency savings to fall back on, you’re always just one financial blow away from disaster. A job loss or a major medical crisis could leave you unable to meet the payments on your debt, which could result in:
- Constant calls from collections agencies
- Being sued for nonpayment, and possibly having your wages garnished
- Having your car repossessed
- Losing your home due to foreclosure or being evicted because you can’t pay your rent
Being debt-free removes these risks. It gives your budget room to breathe so you don’t have to worry about a single unfortunate event ruining your financial and personal life.
4. A Better Credit Score
Carrying a lot of debt really weighs down your credit rating. The closer your credit cards and loans are to the limit, the lower your score will be. A bad credit score can cost you thousands of dollars a year in higher interest rates, making it harder to escape from your debt trap.
The flip side of this is that as you pay off your debt, your credit score will improve. This, in turn, can offer a wide range of potential benefits:
- Better interest rates on any future loans
- Lower insurance premiums
- A better chance of landing your dream job, since employers often check credit scores to see if a potential employee is reliable
- A better chance of finding an apartment, since landlords sometimes do the same
- Better deals on cell phone service
5. Better Job Prospects
Being in debt can also hold you back at work. Worries about money can keep you up at night, which makes you a lot less productive on the job the next day.
If you’ve reached the point where you have to deal with debt collectors, the problem is even worse. They’re likely to call you up at the office, interrupting your work and impairing your productivity. Debt collectors can even contact your employer directly in an effort to locate you – an embarrassing situation that can strain your relationship with your boss.
By contrast, paying off your debt makes your job more satisfying. You feel a lot more motivated to work harder when you get to keep the money you make, rather than spending it all on debt payments. And if you’ve been stuck in a job you hate because you needed the money to pay those credit card bills, paying off the debt frees you to look for a new job that’s more rewarding.
6. Less Stress
Living with debt is a major source of stress. You worry constantly about how you’re going to pay all the bills and what could happen if you lose your job. The constant pressure of having to work to pay off debt, while feeling guilty about spending on even the smallest of pleasures, grinds you down.
A 2013 study at Northwestern University found that young adults (aged 24 to 32) with high levels of debt report overall stress levels about 12% higher than the average. Other studies have found even stronger effects. For instance, in the 2001 Life Events Inventory created by the Society of Occupational Medicine, which ranked 100 life events based on how stressful they are, “getting into debt beyond means of repayment” came in fifth. It was rated more stressful than losing your job, getting a divorce, or becoming temporarily homeless.
Getting rid of debt is like lifting a huge weight off your chest. You no longer feel trapped, like you’re constantly running in a hamster wheel. You can sleep more easily. And, with your thoughts no longer locked into the constant pattern of worrying about money, you can devote more energy to work, family, friends, and pastimes you enjoy.
7. Better Mental Health
Stress isn’t the only mental problem that’s linked to debt. The Northwestern study found people with a lot of debt were 13% more likely than average to report symptoms of depression. A 2014 study published in The Journals of Gerontology: Series B found a similar effect for adults over 50. In this group, having “unsecured debt” (that is, debt that’s not backed by assets, such as a house or a car) had a strong link to depressive symptoms – and the higher the amount of the debt, the worse those symptoms were likely to be.
At its most extreme, debt can even lead to suicidal tendencies. A 2012 Huffington Post story reports that people struggling with overwhelming student loan debt often struggle with thoughts of suicide, and a few have actually taken their own lives.
The fortunate flip side of this is that being debt-free improves your mental health. You’re less likely to suffer from anxiety or depression and more likely to be happy with your life as a whole. A 2014 study at Purdue University found that lower levels of debt play almost as big a role as higher income in people’s overall levels of happiness. It’s a great feeling to know that you own a car or a house free and clear, and no one can ever take it from you.
8. Higher Self-Esteem
Being in debt can eat away at your self-esteem. Psychologists and debt experts interviewed by Fox Business say people with debt often go out of their way to create a life that looks picture-perfect on the outside – a beautiful house, new cars, nice clothes – because they don’t want anyone to know their real financial situation. Of course, all these things cost money, which just makes their financial situation worse and increases their feelings of shame.
By contrast, paying off debt can boost your self-confidence like magic. In the Fox Business article, one woman relates the story of going to buy a new car for the first time after paying off $120,000 in debt. When the car salesman ran her credit check, her initial response was panic – followed quickly by elation as she realized that for the first time, the results would actually be good. This thrill often makes people as eager to share the stories of their escape from debt as they were anxious to hide the debt while they still had it.
9. Better Cognitive Function
Debt isn’t just an emotional problem. It can actually impair your cognitive function – your ability to think and reason. A 2017 meta-study published in Frontiers in Psychology points to numerous studies showing that experiencing poverty – both in real life and in laboratory conditions – impaired people’s attention span, working memory, and self-control.
This is a problem that feeds on itself. Weaker cognitive function can make you worse at making financial decisions, which can make your debt problems still worse. The Frontiers in Psychology paper showed that financially stressed people were more likely to choose small gains now over much larger ones in the future. They also were less adept at evaluating risks. They were less willing to take risks that could lead to long-term gains, yet more willing to take risks that could lead to long-term losses.
Fortunately, studies also show that paying off debt reverses these problems. A 2017 study at the National University of Singapore offered families with high debt a big chunk of money – equivalent to several months’ worth of income – to pay it down. It found that as the participants reduced their debt, their cognitive function rose significantly. They also felt less anxious and became better decision-makers.
10. Fewer Illnesses
The stress debt brings can damage your body as well as your mind. The same Northwestern University study that linked debt to anxiety and depression also found that people with higher levels of debt report worse physical health overall.
Debt can damage your health in a variety of ways. According to psychologist Carole Stovall, one of the experts interviewed in the Fox Business article, stress can be a trigger for heart disease, allergies, gastrointestinal problems, and diabetes. A 2008 survey by Associated Press (AP) and AOL Health bears this out, showing that people with high levels of debt-related stress are more than three times as likely to suffer from ulcers and other digestive problems as people with lower debt stress. They’re also twice as likely to have heart problems, including arrhythmias and heart attacks.
Chronic stress can also suppress your immune system, putting you more at risk for infectious diseases, such as colds. On top of that, money worries can keep you awake at night, further damaging your ability to fight off illness. The AP study found that people with high debt stress were more than twice as likely to suffer from insomnia or other sleep disorders.
When you pay off debt, you can feel better instantly – physically as well as mentally. Those nagging headaches and stomachaches will ease up. And with better sleep and better immunity, you’re more likely to escape that nasty virus that’s going around at the office.
11. Lower Blood Pressure
Having too much debt can actually raise your blood pressure. In the Northwestern study, people with higher debt showed a 1.3% increase in diastolic blood pressure compared to the average. That may not sound like much, but it’s enough to make a real difference to your health. An increase of just two points in blood pressure raises your risk of hypertension (dangerously high blood pressure) by 17% and your risk of stroke by 15%.
This means paying off your debt could do more than make you feel better; it could actually save your life. A 2016 report from the Federal Reserve Bank of Atlanta on how debt affects death rates found that as people’s credit rating improved, so did their mortality risk. An increase of 100 points in credit risk (Equifax’s equivalent of the FICO score) reduced the overall risk of death by 4.38%.
12. Less Pain
Some studies suggest that debt can even cause physical pain. The 2008 AP survey found that 44% of all people with high levels of debt-related stress suffered from migraines, compared to just 15% of those with lower debt stress. They were also more likely to suffer from back pain and general muscle tension. Another study, published in Psychological Science in 2016, found that people with high levels of “economic insecurity” were more likely to buy over-the-counter painkillers.
Even thinking about financial insecurity, the scientists found, could increase people’s pain levels. Subjects who had to think about a financially unstable time in their lives reported almost twice as much physical pain as those who thought about a financially secure period. And since the less debt you have, the less time you have to spend thinking about it, it stands to reason that paying off debt will help ease those aches and pains.
13. Better Preventive Care
Most health problems caused by debt are in some way related to stress. However, there’s one debt-related problem that’s simply a matter of dollars and sense: not being able to see your doctor often enough.
A 2013 study in the Journal of Health and Social Behavior found that people who have high levels of credit card debt or medical debt were less likely to see a doctor or dentist regularly. Even when they were sick, these people often skipped doctor visits because they couldn’t afford the bills. (On the other hand, people with “good debt,” such as home and car loans, were no more likely to avoid doctor visits.)
So, that’s a final way paying off your debt can boost your health: You can always afford to see a doctor when you need one.
14. Better Relationships
Being in debt stirs up a lot of negative emotions, such as anxiety and depression, fear, and anger. These feelings tend to spill over into your relationships with others at work and at home. When you’re worried about how to pay the bills, you’re more likely to snap at your spouse or be short-tempered with your colleagues at work. You get mad at your boss for not paying you enough and feel resentful when your friends tell you about their vacations, since you can’t afford one yourself.
Getting rid of debt will make you a happier person, and that, in turn, will make your relationships better. You’ll be more patient with your spouse, your kids, your friends, and your coworkers. Even new people you meet will like you more when you’re not in a bad mood all the time because of debt stress.
15. A Stronger Marriage
Money problems, including debt, always put a strain on a marriage. Even when both partners see the debt as a problem and are working to eliminate it, the stress it causes makes them more likely to be irritable with each other. It can also affect them physically, sapping the energy out of their sex life.
However, when one spouse is working hard to pay off the debt while the other keeps blithely spending, that’s a situation that’s bound to lead to fights about money – one of the biggest sources of tension in a marriage. The Institute for Divorce Financial Analysts says money problems are the third most common cause of divorce, right after basic incompatibility and infidelity.
The good news is that, when you work through these problems together, your marriage can actually come out stronger at the end. The process of paying off your debt will force you to communicate better, and the experience of surviving a crisis together will create a stronger bond between you.
16. Being a Better Parent
Paying off debt can make you a better parent in several different ways. First of all, it will free up income that you can put toward taking better care of your kids. If your son needs braces or your daughter wants to take up a sport, you won’t go into a panic over where the money will come from. And you can also afford to save for your children’s future – for example, by investing for their college education.
Becoming debt-free will also improve your emotional state. The freedom from debt stress will make you more pleasant to be around and give you more energy to devote to playing tag or helping with homework. And because paying off debt strengthens your relationship with your spouse, it will create a better home environment for your kids.
Finally, the process of paying off debt will make you better at teaching your children about money. You can help your children learn from your mistakes by teaching them how to avoid debt in their own lives.
17. Being Able to Help Others
Getting out of debt has one more big benefit: It makes it possible for you to help out others when they need it. For instance, you can lend money to friends or family members who need it to get through a tough period. If they’re struggling with debt, you can also give them the benefit of your experience to help them figure out how to get out. Sharing your success story can inspire others and give them the boost they need to tackle their own financial problems.
In addition to helping out people you know, being debt-free allows you to give money to charity. Happiness economists have found that spending money to help others is one of the most rewarding things you can do with it. It’s a great feeling to know your money is helping to make the world a better place.
Knowing the benefits of being debt-free is one thing, but actually figuring out how to do it is another. Fortunately, there are lots of resources out there that can help. Start by using a debt payoff calculator, such as the one at Credit Karma, to tally up your debts and set a time line to pay them off. Then create a household budget that sets aside a specific sum each month to put toward paying down your debt – and make this the first bill you pay every month, before you start spending on anything else.
Next, look at ways you can hasten your debt payoff. Consider debt snowflaking, which involves looking for little extra sums of cash to put toward your debt each month. If you have multiple debts, look into the benefits of a debt consolidation loan to reduce your interest and simplify your payments. Also, compare the debt avalanche and debt snowball methods, which throw all your extra money at one debt at a time to pay it off as fast as possible.
If you’re in really desperate straits with debt, try looking for outside help. See if you can negotiate with your creditors to reduce the balance you owe them. Consider talking to a credit counselor about setting up a debt management plan to get your debts paid off in a fixed time frame while avoiding new ones. Do whatever it takes to get that debt out of your life so you can start living fully again.
Do you have a story to share about living with debt or becoming debt-free?