Busting Myths About Debt

We all seem to get into some sort of debt at one point or another during our financial lives. While debt is a choice, it also seems inevitable. Still, many of us hear conflicting ideas and beliefs about debt and don’t know the realities behind these debt myths. So, let’s bust a few debt myths below to see if we can better manage our financial lives.

Myth:

It won’t harm you financially if you make minimum payments on credit cards

Reality: If you make only minimum payments, month after month and year after year, the overall cost of whatever you purchased with your credit card will double, triple, or more because of the account’s interest charges. The minimum payment myth is so alluring because it promises minimal costs to us now. Unfortunately, it extracts maximum costs from us later.

So, what do you do?

Always try to swipe your cards for an amount that you can pay back by the next due date. Even better, make sure you have money set aside to pay off this purchase. Expecting to pay your credit card bill using your future paycheck is a recipe for disaster.

If you want to purchase a big-ticket item, consider the more appropriate financial path of saving up for it and not buying it on credit. If you end up giving in, know that most of us have been there done that. Try to repay the credit card balance as soon as possible.

When payments get too much for you, you might consider negotiating with your creditor for an alternative payment plan. This often involves the credit card company converting your debt to an installment loan with set monthly payments.

Myth:

You have to go into student loan debt to get an education

Reality: Even if it sounds unbelievable, you can complete your education without getting into student loan debt.

Based on a review by StudentLoanHero.com of student loan data, 55% of college students graduating with a bachelor’s degree have some sort of student loan debt. That means that 45% of graduating college students do NOT have student loans. That’s close to half, which is a long way from inevitable.

You can apply for college-specific scholarships or student aid offered by federal and state governments. Check out Money Fit’s own annual scholarship here. Even at $500 or $1,000 at a time, the more you get, the easier college financing becomes.

Several colleges and universities also offer work-study opportunities, which are like part-time jobs, on campus, which can help you earn significant dollars. You can also look for a part-time job outside your campus.

The habit of earning and managing money will also help you have a good financial life later on.

Myth:

Budgeting doesn’t help when you’ve already accumulated debt

Reality: On the contrary, budgeting can help in every aspect of personal finance, regardless of whether you’re trying to pay off debt or avoid debt it to begin with. Budgeting is a must-have tool for your financial life.

After all, a budget is merely a plan for what you want to do with your money. And if you don’t have a plan to get out of debt, it will never happen.

So, when you’re trying to repay debt, plan a suitable budget so that you’re able to save more and use the amount to accelerate your debt elimination.

Myth:

You can instantly increase your credit score by paying back debts

Reality: It is obviously good to repay your debts as fast as you can. But, don’t expect your credit score to improve overnight. It will take some time.

Your credit score is much more than just a reflection of your current financial snapshot. It analyzes your patterns of behavior along with your credit history. So, positive behaviors, as well as negative ones, will influence your credit report and score for up to ten years.

A negative listing in your credit report stays for about seven years. However, when you continue adding positive items, the effect of the negative items decreases, and your credit score will improve gradually.

Myth:

Debt is a very bad thing that you should avoid at any cost

Reality: Yes, it is true that you should try to avoid being in debt problem but the debt itself is not bad altogether. There are potentially beneficial debts too if you can manage them well.

For example, a home loan helps you buy a property, which usually appreciates in value and can increase your net worth. In turn, it’s a good investment for your financial life. When you accumulate enough equity, you can even take out a loan against that and repay your unsecured debts.

Other potentially beneficial debts include business loans and student loans because of their potential to increase either your net worth or your income earning potential.

So, some debts are not bad, but even good debts can turn bad if you don’t manage them properly.

Myth:

You don’t have to worry about debt accumulated from store cards

Reality: Research conducted by CBS Money Watch revealed that an average American has more than $7,000 in debt on credit cards that include store cards as well.

Store cards are tied to a specific retailer and often come with several offers. Usually, such cards offer a 30-day interest-free shopping period. Interest starts accumulating when you don’t repay the balance within that period. Moreover, the interest rates on store cards are usually 10-15 percentage points higher than a typical credit card.

While store cards can often provide an effective way to build credit for those new to credit, they can also lead to overspending and burdensome debt.

So, treat your store cards just like credit cards and go for a card that is beneficial to you. Don’t go for a store card just because you like the shop. You can buy items with your usual debit cards or cash, too.

Myth:

Debt consolidation is similar to settlement

Reality: These are two debt payoff strategies, but they are entirely different approaches.

When you opt for credit card consolidation, you repay your debts in full.

When you can’t pay off your unsecured debts in full but you still have some funds available to pay down debts (just not all), you might think about debt settlement.

In the case of settlement, you explain your financial situation and negotiate with your creditors to reduce the payoff amount, so that you can pay that amount and be debt-free. Just be away that not all credit card companies will be willing to negotiate your debt. Additionally, the third-party debt settlement industry has been full of scammers and fly-by-night companies. Finally, even though many promise they will get you out of 50% of your debts, many if not most clients end up worse off than before, often being sued by their creditors and having their wages garnished.

Paying off 100% of your debts will typically have a positive effect on your credit score, whereas settlement affects your credit score negatively.

So, did you find the answer to your debt question? Manage your financial life to minimize or eliminate debt and you’ll have a better financial future.