This post may contain affiliate links that earn me a small commission, at no cost to you. As always, I only recommend links I personally use and love!
Debt is a topic shrouded in misconceptions and myths, which can lead to poor financial decisions. Understanding the truth about debt is crucial for effective financial management. Let’s debunk 14 of the most common myths about debt.
1. All Debt Is Bad
Many believe all forms of debt are harmful. However, not all debt is created equal. For instance, a mortgage or a student loan can be considered ‘good debt’ as they are investments in your future. It’s about how you manage and utilize the debt.
2. Paying the Minimum Is Enough
Paying only the minimum on credit cards can keep you in debt longer due to interest. It’s advisable to pay more than the minimum to reduce debt faster and save on interest.
3. Debt Consolidation Solves Everything
Debt consolidation can lower interest rates and simplify payments, but it’s not a magic solution. You still need to pay off the consolidated debt, and it requires discipline not to accrue more debt.
4. Closing Credit Card Accounts Helps Credit Score
Closing credit card accounts can actually hurt your credit score. It reduces your available credit, potentially increasing your credit utilization ratio, a key factor in credit scoring.
5. You Can Ignore Old Debts
Old debts can still affect your credit score. While they may eventually fall off your credit report, creditors can still attempt to collect and even sue for payment.
6. Carrying a Balance Improves Your Credit Score
This myth suggests that carrying a balance on your credit card helps build credit. In reality, paying off your balance in full each month is healthier for your credit score and avoids unnecessary interest.
7. Checking Your Credit Report Harms Your Score
Checking your own credit report is a soft inquiry and does not affect your credit score. It’s important to review your credit report for errors and fraud regularly.
8. Marriage Merges Your Credit Histories
Marrying someone does not blend your credit histories. While joint accounts and loans will appear on both credit reports, your individual credit history remains separate.
9. Student Loans Are Only for Education
While intended for educational expenses, some people believe student loans can be used for any purpose. Misusing student loan money can lead to financial trouble down the line.
10. Bankruptcy Clears All Debts
Bankruptcy doesn’t wipe out all debts. Obligations like student loans, tax debts, and alimony/child support are typically not discharged in bankruptcy.
11. Debt Settlement Won’t Hurt Your Credit Score
Debt settlement can significantly damage your credit score. It involves negotiating to pay less than you owe, which can negatively affect your credit report.
12. You Can’t Get Out of Debt on a Low Income
While challenging, getting out of debt on a low income is possible. It requires careful budgeting, prioritizing debts, and potentially seeking advice from a credit counselor.
13. You Don’t Need to Worry About Debt If You’re Young
It’s a common misconception that young people don’t need to worry about debt. However, habits formed early can impact financial health later in life. Young people should be mindful of managing and understanding debt.
14. Debt Collectors Can Do Anything to Collect
Debt collectors are bound by law (like the Fair Debt Collection Practices Act in the U.S.) and cannot use abusive, unfair, or deceptive practices to collect debts.
Michelle Harler is the founder of Guide2Free, a website dedicated to finding and sharing freebies, product testing opportunities, and other ways to save money. With over a decade of experience in the industry, her expertise in finding quality offers makes Guide2Free an invaluable resource for anyone looking to try new products and save money.