The subject of colloquialisms came up on the 'writing craft' section of the Vermont College student message board. Most people agree that using too many slang terms can distract the reader, but it all about finding a - and here's that word again - balance.
For instance, a character in my story might be from Medford, MA, in which case they would say something like this:
"Yorhh rootin' foh the Shahks against the B's? Ah yoo seerious, kid? Yoo bettah take it down a notch befoh yoo get smothahd."
That's just a quick example, and other terms could be used to make it even more confusing for an outsider. Some would say that the above sentence is completely unbelievable, but is this any better:
I walked into the rink with my Sharks hat on. Gino spotted me right away. "You're rooting for the Sharks against the B's," he said, his think Boston accent in full force. "Are you serious, kid? You better take it down a notch before you get smothered."
Some would say, yes, the second example is a million times better, but is it really? Would the first person narrator really stop to acknowledge that someone he clearly knows has a thick Boston accent. Probably not. It would just be normal.
You see, a lot goes into these decisions. Who's narrating and in what tense? What's the context? How far along is the story? etc.