Ah, debt… that ominous dark cloud constantly hanging over the head. The mere mention of it can bring about a cascade of feelings ranging from fear to guilt. If you’re an adult, then chances are that you have some debt. In fact, more than three in every five Americans are in credit card debt. Then, there are federal student loan debts, personal loans, car loans, business loans, and other debt sources to consider.
It’s astounding how much debt people carry! This is why it’s crucial to understand how debt works and unravel the vicious cycle that is riddled with misconceptions, blurring the line between myths and reality.
Here are some common myths about debts that you should not believe anymore.
Myth #1: Any Type Of Debt Is Bad
Many of us have probably seen a friend or family member who has had terrible experiences with debt. This would have led us to believe that all debt is bad. This is far from the truth; debt can actually be a good financial tool if it’s used properly. Debt carries a negative stigma due to a lack of financial education, not understanding the benefits of debt, or not knowing how to leverage it properly.
When debt is managed and used well, it can serve as a tool to attain your financial goals. For example, a loan acquired to purchase a home is typically considered good debt because it usually comes with positive tax benefits and lower interest rates. Real estate investments are another example that allows you to build your wealth to pay down the mortgage.
Myth #2: Debt Should Be Paid Off As Fast As Possible
If you want to become debt-free, you should devise a plan by prioritizing settling bad debts over good ones. So, let’s say you have a low-interest debt with tax benefits, such as a student loan or mortgage. In such a case, it’s better to pay off a portion of it every month while you continue to put money into your other financial priorities, such as an emergency fund or future investments. When you sacrifice saving money for your retirement so you can settle off debts, you only end up losing the potential for compound interest!
Myth #3: Declaring Bankruptcy Is My Only Option
Remember, bankruptcy should be a last resort only after all other efforts and options are exhausted. Consider different options, such as managing debt independently through a financial planning overhaul. You may need to sell off assets, rigidly budget, reduce expenses, and find ways to supplement your income. Another option is to seek help from non-profit credit counselors who can help you develop a long-term plan to settle debt.
Myth #4:All Debt Lowers The Credit Score
Debt doesn’t always lower your credit score. Conversely, obtaining and managing debt appropriately can actually improve it. Your credit score is determined by many factors, such as your payment history, credit utilization ratio, unused credit, etc. Moreover, recent changes in how credit scores are determined have lessened the impact that medical debt can have on the overall credit score.
Myth #5: Paying Only The Minimum Required for Credit Card Is Alright
Yes, at least paying the minimum amount every month is compulsory. But remember, the less you pay on outstanding debts, the more you have to pay in interest. As a result, it will take longer for you to become debt-free. The minimum payment can be offset by the interest you incur, meaning that you owe almost the same total amount on your debt the following month. If you cannot pay the balance in full monthly, try expending $5 more than the minimum payment to halt the debt cycle.
Myth #6: Debt Will Ruin Your Finances
Of course, accumulating debt, such as unmanageable credit card balances, is a massive financial mistake. However, if you manage debt wisely, it can improve your finances. For example, credit card bonus points are a great way of getting discounts. You can maximize your credit card perks by being smart about how you use them, such as paying your credit cards on time, not spending more than you can afford, and settling charges by the due date.
Myth #7: You’re Responsible For Your Spouse’s Debt
Spouses are not legally obligated to settle off debt the other has incurred before marriage. This changes if your name is put on a loan’s promissory note or you have been added as a joint account holder of a debt.
Unless you live in a community property state, were a joint account holder, or were a co-signer on a loan, you’re not responsible for paying off your spouse’s debt upon their death.
Myth #8: Having Debt Makes You A Bad Person
People who associate their net worth with their self-worth are bound to experience stress. Harboring such attachments fuels feelings of embarrassment and shame, which can cause one to feel worthless, hopeless, and withdrawn. As a result, they could accumulate even more debt or fall victim to quick fixes rather than long-term interventions.
If you are under a lot of debt, work with a professional who will assess your situation and offer a tailored solution to tackle issues, one at a time.
