Many of us feel bad about our debt. Most of us probably shouldn’t.
Three-quarters of American households owe money, but the vast majority pay their bills on time and have reasonable debt for their income.
But many people still say they are embarrassed about owing money. In one study, almost everyone in debt thought they would be happier without it. Researchers have also found a “strong relationship” between debt and several mental health problems, including depression.
Sometimes the stress and anxiety of debt is perfectly appropriate. If you’re on the verge of losing your home, have more student loan debt than you could possibly pay in your lifetime, or are heading to bankruptcy court, some angst is understandable.
However, being ashamed of having debt can be counterproductive. The shame of debt might make you want to hide from your situation, which could make it worse. Or you could panic and try to get rid of your debt at all costs, potentially at the expense of long-term financial security.
Debt has a role in our economic life
Borrowing a reasonable amount of money to study or buy a house often makes economic sense. Education can generate increased income, while the home can build wealth over time as the mortgage is paid off and house prices rise.
Ideally, we would save to buy the other things we want or need. In fact, many households borrow when money is lacking and repay it when their cash flow increases. Economists call this “consumption smoothing” because households try to maintain a stable standard of living. (It’s also a consumption smoothing when you save money for your retirement to avoid a big drop in your standard of living after you stop working.)
In addition, borrowing follows a predictable pattern throughout people’s lives. The amount we owe tends to peak in our middle years when we are buying homes and raising families, and then decreases with age. Raising children appears to be a particular risk factor for credit card debt: NerdWallet Study found that 80% of parents with children under 18 had a credit card balance, compared to 58% of survey respondents who did not have children. In addition, 1 in 10 indebted parents expected it to take more than 10 years to pay off their credit card debt.
Pay off debt the right way
It is obviously not a good place to be. Unlike mortgages or student loans, credit card debt cannot be viewed as an investment – just an expense. Interest rates are usually high and that’s money better spent or saved elsewhere.
So if you have credit card debt getting rid of it should be a high priority. Paying off your cards equals a risk-free return of 17% (or whatever your going interest rate). This is quite spectacular, since other risk-free investments, such as treasury bills, are currently earning less than 2%.
Profitable student loans or prepaid mortgage debt also gives you a risk-free return equivalent to the effective interest rate you are paying. However, this rate is usually low enough that it is better to contribute to retirement funds, especially if you get a match with an employer. Of course, you can do both – once you’ve maximized your retirement savings, you can start spending extra money on your low-rate debt.
A smart goal for most people is to be out of debt by the time they’re ready to retire. Going into debt until retirement can be dangerous, as making payments on a fixed income can strain your finances and save you money faster.
All of this assumes that your debt is currently manageable. This may not be the case if you spend 40% or more of your income on debt repayment, including your rent or mortgage. This is the level that the Federal Reserve says is indicative of financial distress.
If debt payments are consuming too much of your income – or if you miss payments, borrow from one card to pay off another, or if you’re sued for your debt – you probably need help. Consider contacting both a credit counselor (the National Foundation for Credit Counseling offers referrals) and a bankruptcy lawyer to understand your options.
The important thing is to act. It would be a shame to let your situation deteriorate because you are too embarrassed to ask for help.
This article was written by NerdWallet and was originally published by The Associated Press.