The average American has a lot of debt: $15,355 in credit card debt, $26,530 in auto loans, and a mortgage of $165,892, according to the financial website NerdWallet. And those who carry student loans have an average balance of $47,712. All of this debt costs the average household $6,658 in interest each year, which is 9% of the average household income.
That’s a lot of money going out the door, and I used to know exactly what that felt like. Four years ago, my husband and I were $200,000 in debt, with $25,000 on credit cards, $21,000 in auto loans, and a mortgage of $154,000. But on October 16, 2015, we wrote a check for $6,292, the balance of our mortgage and our last remaining loan, and became officially 100% debt-free. We joined a minority of Americans—about 20%—who don’t owe anyone anything. It's an exclusive club, but there's hope that it's growing. About half of Americans indicate that being debt-free is within reach, and 25% say it’s the new American Dream, according to a Credit.com survey.
With the Great Recession now in our rearview mirror, many of us consider debt to be one of those four-letter words. Blame aside, it got us into the recent financial struggle, and our attitudes about borrowing are changing. A recent poll done by NerdWallet found that 35% of people would be embarrassed to tell others they have credit card debt, and 49% of Americans would be less interested in dating someone if they knew the person had credit card debt. Millennials are especially sensitive about debt: 55% say they would feel judged if friends and family knew how much credit card debt they had.
"Many millennials came of age during the recession, which could explain their fear of credit cards and the potential debt that comes along with using them incorrectly," says Sean McQuay, NerdWallet's in-house credit cards expert. "Because of this bias, it makes sense that millennials see credit card debt as something that should be judged."
What separates the people who will cross the debt-free finish line from those who never will is a willingness to acknowledge how much debt you have, says A.J. Marsden, assistant professor of human services and psychology at Beacon College. "A lot of people are in denial, refusing to look closely at their own finances," she says. "They don’t want to come up with a financial plan, so they continue to purchase without thinking."
Consumers, in fact, vastly underestimate how much debt they have. According to NerdWallet, lender-reported credit card debt was 155% greater than borrower-reported balances in 2013.
For my family, our financial wake-up call came in 2008 when the auto industry’s outlook was pretty bad, and we were worried that my husband’s job would go away. We had always talked about being debt-free, but never really put our money where our mouths were. The shaky economy had us rethinking purchases, canceling vacations, selling stuff on eBay, and making a budget for the first time. Two years ago, when the automotive coast looked clear, we saw the light at the end of the tunnel and got "gazelle intense," as financial author Dave Ramsey would say. We listed our remaining debts on a whiteboard that we hung in our kitchen and knocked them out one by one. The mortgage was the last to fall, and we got there by following the debt-snowball advice of Ramsey, the automated payments and savings advice from Ramit Sethi, author of I Will Teach You to Be Rich, and the badass inspiration from early-retirement guru Mr. Money Mustache.
While we plan to never go back, a manageable level of debt means your consumer debt payments aren’t more than 10% of your monthly income, says Marsden. "Unfortunately, it’s not uncommon to see people with consumer debts at 50% to 80% of their monthly income," she says. And when the debt ratio starts creeping up, so do psychological and physical side effects.
People who struggle to pay off their debts are more than twice as likely to suffer from mental health issues including anxiety and depression, according to a study from the University of Nottingham published in the Economic Journal. They also feel constantly under strain, hopeless, and incapable of decision making.
"One striking finding of my research is that many people with debt problems describe feelings of being unable to concentrate on day-to-day activities or make normal decisions. This has wider effects on their attitudes and general health," writes lead researcher John Gathergood.
An increase in debt also brings an increase in stress that can manifest itself physically, says Marsden.
"Stress plays a significant role in heart disease, and there is a significant positive correlation between debt and heart attacks," she says. "The more debt you have, the greater your chances of having a heart attack from the stress."
Stress also brings conditions such as migraines, obesity, and accelerated aging. Ironically, many people practice "retail therapy" to counteract the stress, but that just adds more fuel to the fire.
Having debt impacts what an individual can and cannot do, says Coleen Pantalone, a finance professor at the D’Amore McKim School of Business at Northeastern University.
"Carrying too much debt limits choice, sometimes self-imposed and sometimes imposed by a low credit score, leading to lenders refusing to lend more," she says. "We often hear today about the difficulty in saving the down payment for a first house because the individual has student debt, along with perhaps a car loan or lease and credit card debt."
Debt also affects your opportunities, says Pantalone. "For example, it is risky to change jobs or careers when you have all these fixed payments due every month," she says. "Debt can limit your potential and your personal well–being."
Once you acknowledge your debt, the reality can cause you to have anger toward your partner or yourself, says Marsden. "You might ask, ‘How did I/you let it get his bad?’" she says.
You might also resent your employer if you feel you aren’t paid enough, family members who are dependent upon you, or your parents for not teaching you better financial lessons. And debt is harmful to your relationships, especially your marriage.
"Arguments about money is by far the top predictor of divorce," writes Sonya Britt, assistant professor of family studies and human services and program director of personal financial planning at Kansas State University. "It's not children, sex, in-laws, or anything else. It's money—for both men and women."
Debt is a taboo topic: Americans would rather talk about religion or politics than money, according to the NerdWallet study. This fear can lead someone to make bad choices, such as going out to an expensive dinner or exchanging expensive gifts, in order to keep up appearances with family and friends instead of being honest about their struggle with debt.
And a large amount of debt can lead someone into risky behavior, such as opening another credit card, taking on a high interest loan, or getting a second mortgage, says Marsden.
Paying off your debt is incredibly freeing. It eliminates all of the worries and side effects that debt can bring. And it gives you a sense of security that comes with the fact that you don’t owe anyone anything; your choices can be completely your own. Personally, I no longer wring my hands over late checks that can be common when you’re a freelancer. And my husband doesn’t have to stress over the health of his industry, because we aren’t dependent on maintaining a certain income level.
"When people pay off debt, they’re going to say, ‘My stomach feels better, my heart feels better,'" Washington psychologist Carole Stovall told Fox Business. "A marriage that survived the challenge—without the casualties of lost respect or bitterness—will likely grow stronger, and that absolutely has a trickle-down effect on children."
Your first step is recognizing the problem and developing a plan. "Debt is starting to become a worse problem than it was in the past, because it’s so easy to click and buy," says Marsden. "The hardest part is sticking to a budget."
But believe me—it’s worth it.