Knowing the Realities Behind Debt Myths to Manage Your Financial Life
Submitted by Linda Richardson
(Contributions are guest opinions only and don’t reflect the opinion or endorsement of Money Fit by DRS, our staff, client or other interested parties.)
Busting Myths About Debt
Every one of us has to incur debts to manage our financial life. But many of us don’t know the realities behind debt myths. So, let’s find out some of the realities behind popular debt myths so that we can manage our financial life in a better way.
It won’t harm you financially if you make minimum payments on credit cards
Reality: If you make only minimum payments, months after months, you can’t imagine how much you’ll pay as interest charges. If you calculate overall how much you’ve paid, you might be shocked to see that the amount may exceed your original balance.
So, what do you do?
Always try to swipe your cards for an amount that you can pay back within the next due date.
If you’re purchasing a big-ticket item, then try to repay the credit card balance as soon as possible. You can also negotiate with your creditor for an alternative payment plan if you’re not able to pay the entire amount at once.
You need to incur student loan debt to complete your education
Reality: Even if it sounds unbelievable, you can complete your education without being into student loan debt.
You can apply for college-specific scholarships or student aids offered by federal and state governments.
Several colleges and universities also offer work-study opportunities, which are like part-time jobs, on the 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.
Budgeting doesn’t help when you’ve already accumulated debt
Reality: On the contrary, budgeting can help in every aspect of personal financial planning, irrespective of whether you’re trying to pay off debt or avoid debt. Budgeting is a must tool for your financial life.
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 repay your outstanding debts.
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 a reflection of your current financial behavior along with your credit history. So, the good things as well as the bad things, both will influence your credit report and score for a certain time.
A negative listing in your credit report stays for about 7-10 years. However, when you continue adding positive items, the effect of the negative items decrease and your credit score will improve gradually.
Debt is a very bad thing which 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 good 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.
So, some debts are good; just that you need to manage them efficiently.
You don't have to worry about debt accumulated from store cards
Reality: A research conducted by CBS Money Watch revealed that an average American has more than $7,000 debt in credit cards that include store cards as well.
Store cards are basically credit cards with several offers. Usually, such cards offer a 30-day interest-free shopping from a particular store. Interest starts accumulating when you don’t repay the balance within that period. Moreover, the interest rates on store cards are usually higher.
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 credit cards or cash, too.
Debt consolidation is similar to settlement
Reality: These are two debt payoff strategies but they are entirely different.
When you opt for credit card consolidation, you repay your debts in full. But, when you can’t pay off your unsecured debts in full, you can opt for 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.
Consolidation has a positive effect on your credit score whereas settlement affects your credit score negatively.
So, have you got an answer to your debt query? Manage your financial life in that respect so that you have a good financial future.