7 Most Common Myths About Debt

As of June 2023, data from the New York Federal Reserve Bank reveals that the collective debt burden of Americans has skyrocketed to $17 trillion. This substantial sum encompasses a diverse range of financial obligations, such as credit card balances, automobile loans, and the substantial weight of mortgages, among other forms of debt.

Now here are the 7 most common myths about debt.

1. Debt lowers your credit score

The impact on your credit score is not solely determined by the mere presence of debt, but rather by how you navigate and handle that debt. Creditors and credit bureaus scrutinize your debt management practices closely. Even if you diligently make payments to reduce your debts, your creditworthiness can suffer if you frequently pay late or miss payment deadlines.

Conversely, if you maintain certain types of debt, such as an auto loan or a mortgage, and consistently make timely payments, your credit score will go up. This reflects positively on your financial responsibility, demonstrating to lenders that you are committed to effectively reducing your outstanding obligations.

In essence, it’s not about being debt-free but about being prudent and punctual in managing your debts. By consistently meeting your financial obligations on schedule, you increase your credit score making you a more attractive prospect to creditors.

2. Bankruptcy will stay on your credit report forever

Plunging into overwhelming debt can be an incredibly challenging situation, often leaving individuals with a sense of desperation that leads them to consider bankruptcy as their only recourse. The prospect of bankruptcy can be daunting, with concerns ranging from immediate repercussions to the enduring mark it might leave on one’s credit history.

However, it’s important to recognize that bankruptcy will not stay permanently on your credit report. While it is undeniably a difficult decision with financial implications, the impact on your creditworthiness is not indefinite. Typically, bankruptcy remains on your credit report for a period of seven to ten years, after which it is completely removed from your credit report.

Although the process is demanding and may temporarily hinder your financial prospects, it is not that big of an obstacle. Over time, with responsible financial management and rebuilding efforts, you can work to restore your creditworthiness and move toward a brighter financial future.

3. Small debts don’t go to collection agencies

You might believe that having a lingering $20 debt on an old credit card will not give you a headache. However, even seemingly minor debts can be referred to collection agencies for resolution, and these small amounts can indeed inflict damage on your credit score.

It’s imperative to proactively seek out and address any outstanding debts, regardless of their size. A pragmatic approach is to obtain a complimentary copy of your credit report, which can serve as a valuable tool in identifying and managing these debts.

Moreover, it’s worth exploring alternative strategies to eliminate your debts, thereby alleviating the burden of constant worry. This might involve devising a structured repayment plan or considering debt consolidation options.

4. It’s best to make only the minimum payment

When you take a closer look at your credit card statement, you might spot a minimum payment requirement and be tempted to think it’s the sole amount you need to settle to maintain a debt-free status for the month. However, it’s crucial to understand that making only the minimum payment leaves you vulnerable to mounting debt.

In reality, the best practice is to clear the entire balance each month to prevent the debt from snowballing into an unmanageable sum. Unpaid balances on your credit card accrue interest at a rate set by the credit card company, and these interest rates tend to be significantly higher than those associated with other forms of debt.

By settling the full balance regularly, you not only avoid the burdensome interest charges but also establish responsible financial habits. This approach ensures that your credit card remains a convenient and cost-effective tool rather than a source of enduring financial stress.

5. All debt is bad debt

Owning debt doesn’t necessarily signify a negative financial situation; in fact, there exists a concept known as “good debt.” For instance, consider your mortgage, which can fall into the category of good debt. It enables you to secure a place to live while you gradually repay the loan, and ultimately, you acquire a tangible asset in the form of real estate.

Similarly, a student loan can also be considered good debt, primarily because it serves as an investment in your education. This education, in turn, has the potential to significantly enhance your future earning potential. While it may entail debt in the present, it can translate into expanded opportunities and higher income potential down the road.

In essence, good debt is an investment in your future well-being and financial growth. It’s a strategic tool that can empower you to achieve valuable assets or skills that will ultimately outweigh the initial burden of debt.

6. Checking credit report will lower your score

Assessing the state of your credit health is a pivotal step when contemplating applications for significant financial commitments like car loans or mortgages.

Fortunately, you have the right to obtain an annual complimentary copy of your credit report from each of the three major credit bureaus: Equifax, Experian, and TransUnion. This practice enables you to maintain a vigilant watch over your cumulative debt and financial standing.

Importantly, it’s worth noting that reviewing your credit report does not exert any influence on your credit score. Additionally, many credit card providers extend the privilege of offering their cardholders access to free credit scores. This is a valuable benefit you should readily embrace.

7. Closing your credit card will increase your credit score

It might come as a surprise that shutting down your credit cards can have adverse consequences on your credit score. The reason behind this lies in the fact that closing a credit card diminishes both your available credit limit and the length of your credit history, which collectively contribute to a drop in your credit score.

A more prudent approach would be to maintain only a few credit cards that you consistently use over an extended period. This strategy allows you to steadily nurture your credit history, which can be instrumental in boosting your creditworthiness over time.

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