What Are the Long-Term Effects of Debt?

Quick Answer

Paying debt that you accumulated last month, last year or even a decade ago can have a long-term impact on your finances and credit. Inability to get new credit, paying thousands in interest and more can make it harder to reach your financial goals.

Woman contemplating debt

If you're in debt, you're not alone. The total average consumer debt was $96,371 in the third quarter (Q3) of 2021, according to Experian data. That's up nearly 4% from the same time period in 2020.

Carrying debt isn't necessarily a problem; it's what kind of debt you carry and how you manage your debt that counts. If you're spending part of this month's income to pay down credit card debt you accumulated last month, last year or even a decade ago, it becomes long-term debt, and that can carry serious consequences.

Common Types of Debt

Debt is not all bad if managed well. Some forms of debt might be considered "good" debt if it helps you get an education or buy a home. And, as long as you have a repayment plan, debt can help build or rebuild your credit over time.

The common types of debt most people incur include:

  • Credit card: In 2020, 83% of adults had a credit card, according to the Federal Reserve. About 42% did not pay off their balance in full each month, but instead carried over a balance from month to month.
  • Personal loan: In 2022, some 25 million consumers had at least one personal loan, according to Experian data. Personal loans can be used for most any reason, typically have fixed rates and are usually repaid over three to five years.
  • Student loan: Student loan borrowers, on average, had $39,487 in student loan debt in 2021, according to Experian. While student loan debt is generally considered "good" debt, you could be paying it off for years after you graduate.
  • Auto loan: The vast majority of U.S. households own at least one car. In part due to rising prices on both used and new cars, the average length of an auto loan is now 72 months, or six years, according to Edmunds.
  • Mortgage: As of Q3 2021, the average mortgage balance was $220,380, Experian data shows. Most mortgage terms range from 10 to 30 years, with longer term mortgages resulting in more interest paid over the life of the loan.
  • Medical: Over half of all U.S. adults have gone into debt due to medical or dental bills in the past five years, a Kaiser Family Foundation survey found. Having medical debt can also further complicate your reliance on other forms of debt if you use credit cards or personal loans to pay off medical bills.

What Are the Long-Term Effects of Carrying Debt?

Carrying long-term debt can create a buildup of additional costs over time, creating significant long-term effects to consider.

Interest Costs

Interest is the price you pay to borrow money. It is charged on nearly all types of debt and can substantially add to the amount you initially borrow, especially if you carry the debt for a long time.

Generally, credit cards have some of the highest interest rates compared with other credit accounts, like car loans or mortgages. If you only make minimum payments on your credit card accounts (pushing the remainder of your balance into the future), only a small percentage of your payment will go toward the money you initially charged on the card. The rest goes to interest and fees.

For instance, say you have a credit card balance of $1,000 and a minimum payment of $25, and the card charges an average interest rate of 18.5%. By making only the minimum payment each month, it will take you over five years to pay off the balance, and you'll pay $566.85 in total interest—and that's assuming you don't charge a single extra penny to the card in that time.

Interest is also charged on personal loans. If you need to figure out how much you'll pay on your personal loan, check out Experian's personal loan calculator. Remember, the longer the term, the more you pay in interest, although your payments may be less each month.

Fees and Other Charges

Many credit cards charge an annual fee that varies by company and by card. Some cards waive the annual fee in the first year, but every year after that, you'll likely pay it. You may also pay a monthly fixed charge for each transaction.

But there aren't just fees for having a credit card in your wallet. If you transfer your balance from one credit card account to another to save on interest, you'll typically pay a transfer fee. It's also possible to pay additional fees, like late fees if you miss a payment or cash advance fees if you take cash out with your credit card.

Personal loans often charge fees as well. Some lenders charge a loan application fee and an origination fee for processing your loan, for example.

Inability to Qualify for New Credit

Your debt-to-income ratio (DTI) is your monthly debt payments divided by your gross monthly income. It is one factor lenders use to determine if they're going to approve you for new credit. If your DTI is low, creditors might feel you'll be in a better position to repay your loan.

On the flip side, if your DTI is high, meeting your monthly financial obligations can be more difficult. Depending on the type of loan you're looking to qualify for, you may still get approved if you have a high DTI, although the lower this number is, the better your chances.

Collection Costs

Paying back your debts is important, for both your financial and mental health. However, there are times when this may not happen, like if you lose your job or are faced with a costly medical emergency.

When you fail to pay your debts, they may get sent to collections, and if that happens, a debt collector will typically try to contact you to demand payment. Because collection accounts remain on your credit report for seven years from when the debt first became delinquent leading to the account going into collections, this can have a serious long-term impact on your credit score.

Mental Health Impacts

When you have debt, it's normal to worry about how you'll pay your bills or if you'll need to take on new debt to make ends meet. But avoiding logging in to your bank account or opening your monthly bills because you don't want to see what you owe can seriously impact your mental health and also take a toll on your relationships with family and friends.

Physical Health Impacts

In addition to the impact to your mental health, stress and worry over debt can also adversely affect your physical health and can lead to anxiety, ulcers, heart attacks, high blood pressure and depression. The deeper you get into debt, the more likely it is that your health will be impacted. You may consider seeking the help of a credit counselor to help teach you ways to efficiently pay off debt so you can breathe a little easier.

How to Avoid Debt

Although it may not be possible to avoid debt entirely, it is prudent to avoid "bad" debt whenever possible. Here are some tips to help.

  • Pay your credit card balance in full each month. Generally, paying off a balance is a better option for the overall health of your credit. An account that shows as paid in full on your credit report tells lenders you satisfied your commitment as agreed.
  • Pay more than the minimum due. Paying only the minimum due on your credit card prolongs the time you remain in debt. You may pay less each month, but over time you'll actually pay much more because of the added interest that accumulates month to month. Whenever possible, pay off your credit card bill each month. And, if you have an installment loan such as an auto loan, add a little more to your monthly payment to pay off that loan faster. Just check to be sure your loan doesn't have prepayment penalties.
  • Spend only what you can afford. Or borrow only as much as you need. While spending too much is relatively common, it can become a burden and put a hold on other financial goals, like saving for retirement or creating an emergency fund. Borrowing more than is necessary means paying interest on money you really don't need.
  • Create a budget. Creating a budget gives you an idea of where you spend your money. It can also help you stay current on all of your payments, which can help boost or rebuild your credit. Include debt payments, as well as your other regular monthly expenses, in your budget so you have a clear picture of all of your financial obligations.
  • Get help. Sometimes debt can become overwhelming, so it feels easier to do nothing rather than work on paying it off. Debt counseling may be worth exploring. A certified credit counselor can help you evaluate your financial situation, identify trouble areas and offer personalized guidance regarding credit, budgeting and more.
  • Check your credit often. Regularly checking your credit report allows you to see what creditors see when deciding if you're a good credit risk. You can see where your overall credit stands, check your balances and payment history, see how much debt you have and spot any potential problems early.

The Bottom Line

Carrying debt for a long time has become so common that it can be easy to underestimate its consequences—delaying a home purchase, postponing college, putting off investing in your retirement or creating a savings account to name a few. If your circumstances change for the worse, debt can also quickly spiral out of control. But, if managed well, debt can also help free up cash in your monthly budget and improve your credit so you can take advantage of new opportunities in the future.