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MARKETANALYST.US / PERSONAL FINANCE

5 Common Myths About Debt and Repayment That Borrowers Need to Get Rid of

Did you know debt consolidation doesn't always lower interest rates/monthly payments?
PUBLISHED MAY 19, 2024
Cover Image Source: Unsplash | Photo by Towfiqu barbhuiya
Cover Image Source: Unsplash | Photo by Towfiqu barbhuiya

At a time when most Americans are living paycheck-to-paycheck and savings are scarce, debt has become a major part of life. Credit card debt, student loans, mortgages, medical debt, personal loans, and other borrowings can bog down a person trying to make ends meet. According to Clever Real Estate, three in five Americans are in credit card debt with an average debt of $5,875, and the country has about 84 million mortgages totaling over $12 trillion as per Lending Tree. But along with rising debt, myths about it and repayment are widespread. Here are a few of these misconceptions.

Representative Image | Unsplash | Photo by Kostiantyn Li
Representative Image | Unsplash | Photo by Kostiantyn Li

1. All Debt Lowers Credit Score

Debt does not lower credit scores, instead, it can boost credit scores if it is managed well, as per GoBankingRates. People need a credit history to get a credit score. which depends on various factors. Just simply taking on debt can’t lower credit score and things like the length of the credit history, payment history, and credit utilization ratio play their part.

2 Credit Card Debt is Bad

Representative Image | Pexels | Photo by Pixabay
Representative Image | Pexels | Photo by Pixabay

While it is clear that accumulating too much credit card debt is one of the biggest financial mistakes, managing it can also be a great way to improve finances. Credit card users get various bonuses and perks like discounts and cashback which can benefit customers. Borrowers can leverage these perks by only taking as much as they can pay off in a reasonable amount of time.

3. Debt can't be good

Essentially, there are two types of debt, bad debt and good debt. While bad debt is what gets people into trouble, good debt is useful for investing in the future. For example, student loans and business loans which allow borrowers to plan for a better future, are forms of good debt, which can be used purposefully with a clear idea of how it would be paid off.

4. Minimum Payments are the Best Way to Pay Off Debt

Representative Image | Unsplash | Photo by Kenny Eliason
Representative Image | Unsplash | Photo by Kenny Eliason

Lenders require a minimum payment each month from borrowers. Failure to make timely repayment results in late fees or negative marks on credit score. Thus, many borrowers resort to making only the minimum payments thinking it is the best way to pay off debt. While it is affordable in the short run, making the minimum payments can cost borrowers in the long term. Since the smaller payments may fail to outpace the interest rate, borrowers will end up paying more by the time they clear out debt. But by making larger payments, borrowers can get rid of debt faster and pay less in the form of interest as per Bankrate.

5. Debt Consolidation Always Lowers Payments and Interest

Debt consolidation is a great tool to simplify payments for borrowers with multiple debts. It happens when a borrower takes out a single loan against the balance of other collective loans. Using this, all outstanding debts are paid off and the borrower ends up with only one consolidation loan. There is a common myth that the consolidation loan can help borrowers save on interest and lower monthly payments. However, this may not be the case if the interest of the consolidated loan is higher than the collective interest of all the other debts.

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