I’ve encountered many misconceptions about debt in the four years that I’ve been blogging about it. Sometimes a debt myth is mentioned at a social gathering, other times at the doctor’s office, but usually by someone trying to justify why they haven’t paid off their debt. I don’t usually address these myths when I hear them because I don’t want to be that buzz kill at the party that is all “Well, actually…”.
But in case you’ve been clinging to these myths as an excuse not to pay off your debt, here they are, in all of their debunked glory. Here are the most common debt myths that are holding you back from paying off your debt this year.
16 Debt Myths, Debunked
1. Minimum Payments Are Enough
Do you know how long it would take you to pay off a $4,000 credit card balance with a 19.99% interest rate if you only made the minimum payments? 9.5 years! You’d also pay $4,664 in interest – more than the original balance. Minimum payments are just that – the minimum you should be paying. That goes for car payments and student loan payments too.
2. With Interest Rates Low, Now is a Good Time to Borrow
Strategically borrowing money when interest rates are low is technique only seasoned personal finance experts should use.
For the rest of us: the only good time to borrow money is when you have no choice. If you wreck your car and don’t have the money to replace it, rejoice in low interest rates. If you need to borrow money for school, thank your lucky stars that interest rates are low right now. If you’re about to buy a house, count yourself lucky that low interest rates will allow you to pay down your mortgage faster. Low interest rates are not an excuse to leave your debt untackled.
3. My Debt is Good Debt
There is no such thing as good debt and bad debt. There is only bad debt and really bad debt. A mortgage is bad debt but it’s tied to an asset that (hopefully) won’t go down in value. You could clear that debt by selling your home.
Credit card debt is really bad debt, because you likely have no assetsto show for it and the interest rates will keep you in debt for a long, long time. Pay the credit card before the mortgage, but have a plan in place to eventually pay it all off.
4. I Need My Debt to Boost My Credit Score
I have zero debt and my credit score is 812. Debt freedom and decent credit are not mutually exclusive.
5. My Federal Student Loan Interest Is Tax Deductible, so I Shouldn’t Pay It Off
Think of this deduction has a way to soften how much having debt sucks. It’s not a reason to keep your debt. Pay it off and use the freed up cash to contribute to your RRSP, which will also reduce your taxes owing with the bonus of having money in the bank.
6. I’m Late on My Payments, so Now I’m Screwed
It’s never too late to get back on track. Pick yourself up, bring your accounts up to date, get a debt repayment spreadsheet and make a plan to become debt free.
7. The Loan Term My Lender Suggests is the Best One
The average length of a car loan term in Canada is 71 months, up from 62 months in 2010. A longer term is better for your lender, not for you. As an example, a $20,000 car financed at 2.9% over 60 months will cost you $1,509.14 in interest. If you stretch that financing term out to 72 months, you’ll pay $1,814.53 in interest. Choose the shortest term you can, and pay that car off quickly.
8. The Only Way to Afford __ Is Through Debt
Insert your desired term here. A vacation, a car, an education, a house. For every major purchase in life, the usual answer is debt. It doesn’t have to be that way. With the exception of the last item on this list, you can pay for everything with cash. I know this is possible because I do it.
9. There is No Easy Way to Pay Off Debt
Paying off debt is not that hard. Yes, it will take sacrifice, yes you’ll have to get used to doing without a few things, but it’s easy compared to things most of us deal with every day like raising children or working a demanding job. And compared to the struggles of most people on this planet, paying off debt is a privilege. You just need a plan, and you need to follow through.
10. Paying Off Debt Will Make Me Miserable
If skipping dinners out with your friends will make you miserable, then you need to re-examine your definition of miserable. Yes paying off debt means sacrificing, there’s no way around it. But you’ll still be happy, you’ll still enjoy life, in fact, you’ll probably enjoy life more because those little luxuries will truly become luxuries, and not weekly rituals.
11. Paying Off Debt Means I Have to Put My Life on Hold
I adopted a dog, got engaged, married and went on a honeymoon while in debt. I took the frugal route for all of them, and paid for them in cash. I could’ve put these milestones off to pay off my debt a little sooner, but I’m a firm believer that you can pay off debt and live a great life at the same time.
12. Debt Is Part Of Everday Life
This is one of those myths that is true, until it isn’t. Debt was a daily part of my life while I was a student and for two years after. Then one day it wasn’t, and hasn’t been since. You don’t need debt in your life, and I guarantee your life will be much improved when you say goodbye to your debt.
13. I Still Have Time Before I Need to Pay Off My Debt
The best time to start paying off debt is today. Whether you’re in your early 20’s and just starting a new job, or your 30’s with a couple of kids, or you’re a few years away from retirement. The sooner you pay off your debt, the sooner you can focus on building real wealth.
14. Everyone Has Debt
It may seem like everyone you know has debt, but that’s not true. I don’t have debt, and you know me, so there’s one. There are probably others in your social circle that are debt free, but in my experience the debt-free people don’t make a habit of sharing this little tidbit because it can make other people uncomfortable. Anyway, using the “everyone is doing it” excuse is played out. *Puts on best mom voice*
Just because everyone is doing it, should you?
15. The Only Benefit to Debt Freedom is Fewer Monthly Payments
I used to think this. I used to think “If I could just pay off my debt, that’ll free up an extra $500 in my budget every month!”. That was all I was focused on. Once I paid off my debt, I realized that life without debt is about so much more than no minimum payments. It’s about possibilities. The possibility to buy a home, or have a well-funded retirement. Or to start a business, or switch careers. Or simply to accumulate enough cash to stop worrying about…well, everything.
16. It’ll Get Paid Off Someday
No, it won’t. Because the game is rigged against you. Most of the companies you interact with have a vested interest in you staying in debt. They make more money if you stay in debt, and they make it their business to tempt you into offers that will keep you paying them interest forever. No one wants you to be out of debt except you. If you don’t actively do something about your debt, it’s here to stay.
Do you have any debt myths to add to this list? I want to know!
Photo Credit: Олег Жилко