Tallying the True Cost of Debt

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The financial side is easy to quantify, and the numbers are huge. Americans are drowning in debt, carrying a record $972.5 billion in revolving charges at the end of 2007, according to data from the Federal Reserve.

"The average household has $11,000 to $12,000 in credit card debt," says Christopher Viale, president and chief executive officer of Cambridge Credit Counseling Corp. Those figures are diluted by those who don't hold any debt, he adds. Households that carry debt from month to month carry close to $17,000 of unsecured debt on average, he says.

One out of every five households is either behind on payments or over the limit on at least one account, he adds. "Up and down every street in America, you go to every fifth house and they're living in the penalty rate zone on credit cards."

To put things in perspective, he calculates that the interest and penalties alone on a debt of $17,000 totals $400 a month. "The first $400 they send doesn't pay down the $17,000," Viale says.

Beyond the numbers

On the human side, the consequences of debt are never isolated. As hard as we try to compartmentalize our problems, the lines often become blurred.

In one extreme example, a school bus driver had been driving up debt at home and hiding it from her husband. Finally she came in to meet with credit counselor Howard Dvorkin, founder of Consolidated Credit Counseling Services, bringing her husband along to get the bad news.

"Her husband is physically a very large man," Dvorkin remembers, "and it was obvious that he was getting mad. You try to smooth things over, but it was a very uncomfortable situation."

Flash forward a few months and Dvorkin sees her on TV: Bus driver arrested for robbing a bank. She pulled the bus right up to the door, jumped off, robbed the bank, hopped right back on the bus and drove off. "The pressures are tremendous in a family," he says.

Debt can have many ramifications in our daily lives.

Opportunity cost

Freshman year at college is a time of new experiences, including credit card offers. But the future is a lot to trade for free T-shirts and water bottles -- the freebies offered by lenders. Campus booths hawk easy credit and in no time many students receive bad marks on their credit scores before ever leaving university. In fact, debt rung up during college can cut an education short.

Even kids who make it to college on their parents' dime can easily throw their educations away unless they've learned how to handle credit. Lewis Mandell, Ph.D., a debt expert and finance professor at the University of Buffalo, sees a lot of students who are forced to drop out because they had not paid enough attention to how much debt they'd run up.

"A very large proportion of those who drop out for that reason never get back in," he says. "So you're condemning yourself to a life of underperforming your own ability."

In finance jargon, it's called an opportunity cost. By not sticking with the curriculum and getting sidetracked by debt, many young people forgo the college diploma and the opportunities and higher earnings that come with it.

Job prospects

It's increasingly true that your three-digit credit score is a stamp of approval or a brand of shame on your forehead. Once you've been branded, the consequences affect you in ways that would have been unimaginable a few years ago.

Students who leave college early to pay bills may find it difficult to get a new job with ruined credit. Even with a degree in hand, a high GPA won't always offset a low FICO score. Viale warns students that accumulating debt during college could cost them job offers.

"Employers do judge you now on your FICO score," he says.

That goes for anyone who's unemployed at any age. Employers routinely check credit scores along with work history and personal references.

But for those who already have a good job, a low credit score is sure to be costly in other areas of life. Even if your score is high enough to get an apartment, over the long term you'll get nickel-and-dimed through higher insurance premiums, as well as costs of car loans and mortgages. Viale says: "Whatever your number is, is who you are these days."

Worker productivity

Our preoccupation with debt is affecting our performance at work and hindering our ability to grow our job income through employment and job advancement.

"The No. 1 stress in America right now is, 'How can I pay my bills down,'" Viale says. "Folks that are carrying credit card debt from month to month, as most people in this country do, tend to have thoughts of 'How am I going to do this? What am I going to do tomorrow?' Because everyone's living paycheck to paycheck -- there's no savings rate."

Not only does this matter on a personal level, it hits at the heart of business profitability and extends to our national economy.

"The No. 1 loss of income from corporate America right now is lack of production by their employees due to stress levels or preoccupation caused by debt," say Viale.

Peace of mind

Every phone call placed to a credit counselor comes from someone who is embarrassed, ashamed of where he or she is at and trying to come to grips with how debt happened. He or she never intended for it to happen.

"We're not dealing with abusive consumers," Viale says. "We're talking to people with debt that accumulated over time, consumers who don't understand how it's affecting them, how it affected them and how it's going to affect them in the future. That's the mentality of the consumer that's calling us right now."

Collection calls compound the anguish. "We see people here all the time crying because a lot of times collectors lie to them, saying that the police are going to come to the house, that they're going to sue them," says Michael McAuliffe, president of Family Credit Counseling Service in Rockford, Ill.

Partner relationships

Debt certainly can create relationship problems. McAuliffe says he sees signs of this all the time. Couples come in blaming each other, especially if they have different spending styles or debt tolerance levels.

McAuliffe has seen marriages end over debt: "One of my close friends got divorced and debt was a big part of that. He couldn't stand the debt and took out loans on the house to pay off the credit cards. Then his wife ran them back up again. It was killing him. He really has a very low debt tolerance."

Future generations

The side effects of burdensome debt can impact children in multiple ways. If you are preoccupied with debt or depressed, you'll bring that anxiety home to your family.

If your debt problems get truly out of hand, you may need to uproot your kids and move to a new neighborhood, or even a different school district. "I've seen families move back in with one of their parents," McAuliffe says, "so they can save the money that way."

Says Mandell: "Parents, by running up a lot of debt, may unwittingly be passing on this debt burden to their children." Your financial situation spills over to your ability to pay for your kids' college education.

"If you don't pay for your kids' higher education, two bad things can happen," he says. "No. 1, they don't get higher education, or No. 2, if they do get higher education, they rack up huge amounts of debt doing so, which really puts them behind the eight ball."

Heading into parenthood already saddled by debt creates a particularly challenging situation. Kids are expensive, bringing with them more opportunities for parents to go further into debt and fewer opportunities to get out of debt. Adding to that, Mandell explains, is timing.

"These days with the average age of childbearing in the 30s, it means that the kids won't be out of school until your mid-to-late 50s. It gives you a very short horizon for saving money. If you didn't save money when you were younger, the beauty of compounding doesn't have time to work its magic."

Achieving goals

The gotta-have-it-now mentality enabled by easy credit actually prevents many of us from having nice things in the future. Time was we saved for the special things; now, as Viale points out, we aren't saving at all.

"Debt is keeping us from reaching those goals or obtaining those perks that we want in life to live more comfortably. We're doing it on credit, but we don't understand the consequences that will come down the road."

Even if you don't lose your home to bankruptcy or foreclosure, getting out of debt could cost you your home. "Downsizing a home is always one of the toughest things to do, but when the house you're living in is more than you can afford -- it should never be more than 35 percent of your total budget allocation -- it's time to really consider downsizing," says Viale.

Spending power

Paying off debt really cuts into spending power. Before you whip out the plastic to make a purchase or sign an in-store loan, make sure you think your purchase is a deal at nearly twice the price, because that's what you might end up paying.

For example, if you make $1,000 purchase with a credit card carrying an average interest rate of 16 percent, and then make minimum payments -- you're not getting a good deal.

In that situation, says Viale, "A TV that costs $1,000 really costs $1,600."

Creditors send offers with limited-time, low teaser rates of 1.9 percent, according to McAuliffe, because their research shows we won't pay it off in time. "A lot of people have good intentions about it and think they'll pay it off in six months," he says. "And then they don't and are stuck with the debt.

"Then," he adds, "what's the big deal if you add a new dress to it or a dinner?"

Consider that even if the low rate isn't a teaser rate, you could lose it with any misstep.

"When you get 3.9 percent for the life of the account, you think it is locked in for good, but it's not. A missed or late payment on that or any account can raise the rate," Viale says. "Too many folks feel protected by a deal that they think is good for the life of the loan."

Viale reports the average consumer who comes to his organization is carrying $16,000 to $17,000 in debt at an average interest rate of 23 percent. If you do the math on that, that's roughly $325 in interest, not including over-the-limit or late fees, which could be a total of $60 per account. And the average person they talk to holds eight accounts.

"If someone is behind on their accounts or they're over the limit, you're looking at almost $800 a month in fees and interest each month," he says. "More than half the folks we talk to are behind on all their cards."

Things can get pricey very quickly if you trigger the universal default policy. Viale explains: "If you trigger any default, that raises your interest rate into the penalty rate on all your cards."

Penalty rates range from 19 percent to 24 percent, according to Bankrate. However, the rates for those with bad credit can range from 26 percent to 29 percent. McAuliffe says he's seen rates as high as 34 percent.

"You could see your monthly payments double because you missed one payment on one card," says Viale.

Security

Play too close to the edge and you might fall in. "Taking on a huge amount of debt, anything that goes wrong in life," says Mandell, "from losing a job, to divorce, to having your car die or needing a new roof, can push people over the edge into financial distress -- bankruptcy and things like that."

Once you are in a vulnerable position, it's easier to be taken advantage of.

"In many ways, the democratization of credit is a good thing," says New York Law School professor and debt expert Karen Gross. "Members of society who could not previously get credit now can do so -- that is the good news and I am not against credit.

"The bad news is that credit extenders target these vulnerable communities and in some cases, overcharge for the credit extended. There are lots of people who are trying to take advantage of vulnerable people."