Debunking Debt Myths: 5 Common Misconceptions
Debt becomes less scary when borrowers are well-informed
To many people, debt may seem like an insurmountable obstacle, but debt can be easily managed with the right information. Millions of Americans carry some form of debt, either from credit cards, medical bills, or student loans. Even though debt is common, there are still many myths and misconceptions that impact the financial well-being of people and especially their creditability. Thus, knowing the facts and not falling for myths can help people be responsible about taking on debt and paying it off as well.
Here are 5 myths about paying off debt that you should know.
Myth 1: It’s best to pay off all debt as soon as possible
Fact: Paying off all debt at once may not be the best thing to do. In case people want to become debt-free, a plan should be made to prioritize paying off bad debts over good debts. For example, for low-interest debt that may have tax benefits, such as a mortgage or low-interest student loans, it is best to pay off a portion of the debt each month to keep getting the benefits and have more cash in hand.
Myth 2: Any type of debt is bad debt
Fact: No matter how bad taking on debt may sound, not all debt is bad debt. Borrowing money can also allow people to invest in the future. For example, people can start a business, by taking on a loan for the seed money and run it for perpetuity, making more than they borrowed. Another example is student loans which help people to invest in their future. Further, several types of debt allow people to get tax benefits as well.
Myth 3: Minimum payment is the best way to pay off debt
Fact: While making minimum monthly payments can seem like a good idea in the short term, it may hurt in the long term. Usually, lenders set a minimum payment on the borrower’s balance each month to avoid late fees or negative marks on credit scores. Thus, making just the minimum payment can allow borrowers to have more cash in hand. However, this may lead to delayed repayment of the loan and cost the borrower exponentially more in the form of interest.
Myth 4: Checking credit reports will lower credit score
Fact: Every US citizen is entitled to one free credit report every 12 months from each of the three national credit bureaus. Apart from them, several other financial providers also provide information on credit scores at no cost. When determining the credit score of a borrower, the FICO credit scoring model does not take the number of requests made to obtain the credit report.
Myth 5: Maintaining a good balance is needed for a good credit score
Fact: Maintaining a good credit balance may not always be good for the credit score of a borrower. A borrower’s credit score is determined by several factors. The biggest factor is a record of regular and on-time payments on the credit balance. The next factor would be credit utilization and how much is borrowed each month. In case, a borrower has a large amount of debt, the credit utilization ratio will lower, affecting their overall credit score. Further, carrying a balance from month to month when not needed will result in a higher interest charge.
