Debt is a part of American life. Doubt it? Check out the following statistics:
- 80% of Americans have consumer debt
- Americans collectively owe $14 trillion in debt
- The average U.S. mortgage balance is $215,655
- 13% of Americans will be in debt throughout their lives
- About 20% of Americans have no emergency funds
- About 20% of Americans use more than half of their income to make monthly debt payments.
- Almost 50% of American households live from paycheck to paycheck
With so much debt ingrained into the social fabric of American life, it’s only natural that myths get thrown around from time to time. In this article, we debunk some of the most common debt myths.
All debts are bad
You might be thinking, “Well, wait a minute, are debts a good thing.” Of course, it’ll be perfect if you can waltz through life without having to rely on debt, but that doesn’t mean that debts are necessarily bad.
Sometimes, debts can even be a good thing. Mortgages make it possible for normal Americans to own a home, just like student loans make it possible for many students to get a college education. All other things being equal, a college education opens up the opportunity to earn more and lead a better life.
Debts are only bad when they’re used wastefully. For instance, many people get into credit card debt because they spend on things they cannot afford.
Pay off all your debts as fast as you can
While living a debt-free life is endearing, it’s something that may take a long time to achieve, depending on your current financial situation. That’s why it does you no good if you stress too much about it. What’s important is you prioritize paying off bad debts or high-interest loans.
You can temporarily minimize payments on low-interest debt that may have tax benefits like low-interest student loans and mortgages. At the same time, you invest in an emergency fund or make safe financial investments. When you sacrifice saving for retirement so you can pay down low-interest loans, you do yourself a disservice. You cannot reap the compound interest benefits of investments, and you consequently get less money in retirement.
Making minimum payments on my credit cards is okay.
While paying your debt too fast might not be ideal, making only minimum payments is NOT okay! While you’re legally bound to make at least minimum payments monthly, making only the minimum will significantly increase the amount of money you’ll pay back in interest. Moreover, it will also increase the repayment time, thereby hanging the debt burden on your neck for too long.
On the other hand, when you make more than the minimum payment required, you’ll clear off your debts sooner, and you’ll pay less in interest.
You’re responsible for your spouse’s debts after marriage.
Well, this is partly true. For joint accounts you open after marriage, you and your spouse would be equally responsible for paying it off. Similarly, if you live in a community property state like Arizona or Texas, you are responsible for your spouse’s debt even after they pass away.
On the other hand, you are not responsible for the debts your spouse incurred before the marriage. Also, if you live in a non-community property state, you are not liable for the personal debts of your spouse.
People in debt are irresponsible.
Sure, lots of people get stuck in the chains of debts due to poor financial decisions. However, many also find themselves in debt due to situations out of their control. For instance, some students cannot repay their student loans because they are unable to get gainful employment even with their college degrees. Similarly, some do get into serious debt due to some serious medical emergency. Some get involved in accidents or illnesses that take away their ability to keep their jobs. It’s simply unfair to assume that only irresponsible people get into serious debt!
Bankruptcy is the only way out of debt.
When you feel overwhelmed with debt, you might think declaring bankruptcy is the only way out! Maybe you’ve even had your friends and family suggest that to you. But know this: there are several other alternatives to bankruptcy.
Your financial troubles might make you a good candidate for debt settlement or debt consolidation. Make sure you consider other debt-relief options too.
Bankruptcy should only be used when there’s no other viable option to manage your debts. Why? Because while bankruptcy might wipe off most of your unsecured debts, it will cause serious damage to your credit-worthiness several years down the line.
Debt can be a negative feedback loop that is seemingly impossible to break out of. Do not fall victim to the redundancies here. We understand the end-to-end processes and compliances involved in financial mitigations. Reach out to us today for more information on how we can help you. We’re looking forward to hearing from you.