When it’s used as a personal finance term, “debt burden” refers to your cost of borrowing money. Each of the ways you borrow money – credit cards, home mortgages, car loans and student loans are the most common – will incur some type of finance charge, and sometimes a given debt or credit account will incur multiple types of charges.
In addition to an interest charge, there may also be account servicing fees, transactional fees, as well as late fees if you don’t make payments as required by the terms of your loan.
It’s important to distinguish between your debt and your debt burden, because different types of debt impose a different level of burden on the borrower. Here is some additional insight:
Debt vs. Debt Burden. For example, if you own your home then your mortgage is likely to be the single biggest debt you have. However, home mortgage interest rates are currently at or near record lows. Furthermore, the interest you pay may be tax deductible, which reduces the actual cost of borrowing for your home even further. In contrast, the interest rate you pay on credit card debt is likely to be five times greater than your mortgage interest rate, perhaps even more. So if you carry significant balances on your credit cards, it’s quite possible that the debt burden of those cards is greater than your home mortgage, even though the debt on the home mortgage is larger.
Bad vs. “Not So Bad” Debt Burdens. While it’s preferable to have not outstanding debt at all, not all debt is created equal. Some types of debt are almost always bad, and should be avoided, whereas incurring other types of debt may end up helping you in the long run.
What to Do About Your Debt Burden. A cornerstone of your financial plan should be reducing your debt and your debt burden, because spending your money on interest and fees prevents you from saving for more important things, such as your retirement. As you decide on which debt burdens to reduce first, make sure to prioritize them based on their overall costs, as well as the benefit that you may receive from that debt.
Tags: borrowing advice, debt burden, reduce debt burden
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