If you’ve ever carried debt, you’re familiar with the overwhelming feeling that comes with it. Unfortunately, it’s a common experience, but many hold misconceptions about it. The problem is that these only add to the stress when you could be living a happier life.
By shedding light on these misconceptions, you can work with debt more effectively and reach financial freedom faster. Let’s debunk these misconceptions about debt and pave the way for a bright economic future.
1. Debt is Always Bad
Depending on who you ask, debt might be bad most of the time, but it’s not always bad. For example, taking out a loan to purchase a home may be necessary if you don’t have $200,000 or more in cash to pay for it. However, if you can comfortably afford your mortgage and still be able to save money each month, this debt isn’t bad. You may even save additional money renting out extra space in your home.
On the other hand, spending hundreds of dollars on brand-name clothing is bad debt. Assuming you don’t have the money to pay for these items in cash, you’re accruing unnecessary credit card debt and may pay high interest fees.
2. Carrying a Balance Boosts Credit Scores
You don’t need to carry debt to build credit. Instead, pay off your credit card balance in full each month. Good credit revolves around a good payment history. Additionally, you want to build good debt habits. Otherwise, you’ll get accustomed to accruing a credit card balance month over month.
3. Credit Card Debt is Unavoidable
Avoiding credit cards is completely avoidable. The problem is lifestyle inflation and the challenge of keeping up with the Joneses. Start by setting meaningful financial goals. For example, paying off your car loan to be able to take a trip this year. This way, you’re more likely to stay committed and avoid impulsive purchases that dig you further into debt.
Additionally, if you’re currently in debt, set a goal for when you’d like to be debt-free. If you carry large amounts of debt, you may not like how long it will take you to pay it off. However, this can motivate you to avoid building more debt and figuring out ways to pay it off faster.
4. Debt Consolidation Solves Everything
Debt consolidation can help make your debt repayment process easier, but it won’t solve all your problems. If you continue accruing debt, it will be harder to take out a loan to consolidate it. The real answer to your debt problem is to stop accruing debt. Avoid purchasing items you don’t need and can’t afford.
Set a budget and stick to it. Managing your money will require discipline and hard work. However, the end result will be that you accrue little to no debt and reach financial freedom faster.
5. You Can’t Get Out of Debt
Carrying large amounts of debt is a tough pill to swallow. This may be why many refuse to have a budget or accept it as a part of their daily lives. However, the truth is there are countless stories of people who have paid off thousands of dollars of debt, and you can too. It will be challenging, especially if you earn a low income, but it’s not impossible.
Instead of dwelling on your current situation, figure out ways to increase your income and trim all your unnecessary expenses. As you see your savings grow each month and your debt diminishes, you’ll feel better, no matter your income.
6. Missing One Payment Isn’t a Big Deal
Although being late with a payment won’t be detrimental to your credit score, this is a huge deal for you. Why? Consistently being late with your payments will eventually hurt your score, but more importantly, it’s a bad habit to carry. You’ll pay a late fee and, if you’re not careful, this bad habit will carry over to other parts of your life.
7. Debt Settlement Won’t Hurt Your Credit
Debt settlement involves you paying slightly less than your current debt balance. For example, you can call credit card companies and explain your current financial situation. They may or may not agree to offer a lower interest rate or balance, with the agreement, you’d pay off the entire balance.
Additionally, you can work with a debt settlement company. They’d do something similar, but with the difference that you’d pay them a fee. This comes with risk, often increasing your overall balance and damaging your credit score. Additionally, working with a debt settlement company can be a lengthy process. This is why you should avoid accruing large amounts of debt.
8. You Must Pay Off Debt Before Saving
Although using all your income to pay off your debt might seem smart, it can backfire. For example, it’s smart to have extra money in case of unexpected emergencies. Otherwise, you can get stuck in the vicious cycle of paying off debt and accruing some unexpectedly.
To reduce your risk even further, find ways to make extra cash. Go to garage sales, find stuff for a few bucks, and sell it on eBay for a profit. Additionally, you can drive Uber if you have an extra car you don’t mind putting extra mileage on.
9. Only the Rich are Debt-Free
If only the rich were debt-free, there would be no upper class. This is an exaggerated statement, but to one day be wealthy, you have to figure out how to be debt-free. Otherwise, you won’t be able to save and invest your money. As mentioned before, no matter how much debt you carry, start by accepting it and setting a goal with a timeline to pay it off.
10. Bankruptcy is an Easy Way Out
Bankruptcy is an option that’s available for many, but it’s a far cry from easy. Assuming you qualify for bankruptcy, you’ll need to have your case approved by a judge. Additionally, debts like child support won’t be discharged. Finally, declaring bankruptcy will have a severe negative impact on your credit score.
Consider bankruptcy your last resort. Instead, figure out the best way to pay off your debt because it’s these habits that will ensure you avoid it in the future.
11. All Debt Advisors are Helpful
Ultimately, debt advisors work for a fee to help you manage your budget. Keep in mind that not everyone has your best interest in mind. If you’ve been struggling with debt for years and need guidance from a financial expert, debt advisors may help. However, be quick to fire those who only want to take your money and aren’t bringing results.
12. You Need a High Income to Pay Off Debt
There are people earning $200,000 with large amounts of debt and those earning $50,000 with little to no debt. The secret is how you manage your money. This means you don’t need a high income to pay off debt. Start by reducing your monthly expenses, and set a goal to pay off your current debt. Setting a timeline is important because it creates a sense of urgency. Otherwise, you may be stuck with small amounts of debt for years to come.
However, you’re also not limited to your current income. If you invest in your education, you can switch careers to a more lucrative one in a few months or years. Additionally, you can flip items from garage sales or drive Uber for extra cash.
13. Old Debt is Irrelevant
Debt, whether old or new, should matter to you for one reason: it needs to be paid off. If you’re able to, consolidate all your debt into a low-interest loan or credit card with 0 APR for 12-18 months. Your goal is to pay off all your debt regardless of its age.
14. Paying the Minimum is Enough
Avoid paying the minimum at all costs. Doing so will cost you hundreds of dollars on top of your original balance. Instead, pay as much as you can monthly, as long as you can save some money for your other savings goals. The minimum loan balance amount appears convenient, but it’s not designed to work in your favor.