I have heard many myths about debt that have led people astray on their path to forge their wealth. In this post I will illustrate some of these myths and how to better handle debt.
Debt Is A Tool To Help The Consumer
Debt only helps you get what you want before you have the money to buy it yourself. In fact one of the greatest myths about debt is that it has a significant economic benefit for the consumer.
Debt is artificial demand. When money is scarce for some products/services debt can help to insure demand for said products/services is high. This can be used to insure prices are high and inventory is sustainable. Consumer debt will help industries far more than the consumer. If you do not know how to handle debt, you will not benefit, but many industries will.
No One Is Without Debt
Hello there, my name is apparently “no one.” Can I introduce you to my wife, also named “no one?” Everyone who ever told you this myth about debt has taken on debt and they themselves believe debt is naturally.
80% of US citizens have considerable debt so there are far more people with debt than without debt. Since there are more people with debt than without, the people with debt have a louder collective voice.
Yes, it appears few people have debt, but there are many whispers inside that storm of noise that are telling you how to handle debt and that life without debt is doable.
Debt Is Bad
Debt may be a tool that was intended to increase demand for industries, but it can be utilized by consumers to obtain assets that are just beyond their reach. These can include some real estate, some student loans, and some business loans. The idea is to invest the said debt into assets that will provide a larger return of investment than the interest rate. But as mentioned, when you invest there is no guarantee of any returns, much less average returns. The debt is consistent though.
The question is not whether the debt was faulty. The effectiveness of the debt is a combination of the borrower’s adaptability and the quality of the investment. In the end, debt is debt, how you handle debt will turn it bad or good.
You Own Your Partner’s Debt If You Marry Them
Nope. Truth is you should do what you can to help your spouse pay off their debt. That’s called a good marriage. But marriage does not join debt. The only time you share debt is if you both sign for a loan. For instance, if you both sign for a mortgage that is a debt you both have.
Only Poor People Use Credit Cards, Rich People Use Debit Cards
This is a bit of a mixed myth. Rich people do in fact use credit cards. However, what distinguishes the rich from the poor pretty well is the number of credit cards they use. Research shows that only 8% of rich people use more than one card while 77% of poor people use more than one credit card.
There are three general reasons to need more than one card. 1) You do not have the money to pay for your lifestyle straight forward. 2) You have too low of a credit score that your credit limit cannot sustain you. 3) Most likely both.
Not having money to pay for your lifestyle is the definition of poor. If your credit limit is too small the most likely reason is you do not have good credit, which means you may not have not done a very good job of paying off the money you owe. In general, the rich know how to handle debt, the poor, not so much.
Debit Cards Are Not The Answer
Many people claim that debit cards are a better answer. They frequently cite the study which found that buying with physical money triggers the pain center of your brain. However, that is because you know how much money you are losing. It makes little difference if you pay with a debit or a credit card.
There are two crucial differences between credit cards and debit cards. Credit cards provide some rewards for spending while debit cards do not as much. Furthermore, credit cards can be used to spend money you do not have while debit cards do not. Oh wait! You can overdraw from your account and accrue fairly massive fees and a loan. In total the costs of overdrafts from debit cards are worse than the APR of most credit cards. Never mind, there is one crucial difference.
It is not the plastic that kills wealth, but the user. It is never a good idea to give unlimited access to credit of any kind to an undisciplined person. For instance, I have been using my credit card more often recently. Albeit, it is more because for some odd reason I want to stay away from cramped spaces where people frequent than avoid using plastic. I do not know where this feeling came from, I did not have it earlier this year. Could it be a summer thing? I still only use my plastic within my means though. One of the most dangerous myths about debt is that it is only caused by tools and not in combination with character.
Credit Cards Can Help You Build Wealth
The most useful thing credit cards can do is build your credit score. I think it may be because of ads for credit repair, but credit is not a different form of money that you can use to improve your lifestyle.
Credit scores are collateral and nothing more. If you do not make your payments, your credit score can be ruined and you may have limited access to credit in the near future. Your credit score can only be used to have access to debt. The only way debt could help you build wealth is if you use that debt to buy assets and if those assets help you build wealth.
The reward points? Please, those are low percentages, there are savings interest rates with higher percentages. That will not build your wealth.
Credit Cards Should Be Spent On All Of Your Needs
NOOOOOOOO! Some people suggest this because you might as well get the 1 or whatever percent rewards for what you spend. However, there are many instances where using credit cards can actually add costs. These include some medical bills, insurance, and housing. Some of these bills include fees for using cards around 3% and some as high as 5%. This will negate even the most generous rewards from using a card. Admittedly, this is one of the least dangerous of all myths about debt.
Use credit cards only when you go for groceries, fuel, and stores that usually take cards. They usually pay for physical money transfers and see the good in using plastic.
Closing A Credit Card Helps Your Credit Score
This one I learned the hard way. I believed the myth about debt that keeping a credit card when you have excellent credit score only has the potential to hurt your credit score. How wrong I was. Almost the instant I closed that credit card my credit score dropped about a hundred points. I signed up for a new and better credit card and had it restored within a matter of months.
My credit score never even went as low as fair. Can your credit score lose a hundred points and still be able to take out a decent credit card? I know many people in a similar situation as I put myself into would have next to no access to credit. That damage could have been harder to reverse.
Much of what you know about debt should be learned from others so you do not make those mistakes. Unfortunately, there are many myths about debt out there. You could easily ruin your path to forge your wealth listening to any of them. Ultimately, you still need to blaze your path to learn how to handle money and debt so no one is to blame for which road you go down except yourself. But following your instincts could lead you to places you never knew.