Worst Advice About Debt
Advice is cheap. But taking bad advice can end up costing you, big time. Have you heard any of this advice when it comes to debt? If you have, now’s the time to rethink what you’ve heard.
Bad Advice: Carry a balance on your credit card each month to build your credit score. In reality, your credit card balance makes up only a small part of your overall credit score. In fact—and more importantly—your payment history on lines of credit (credit cards, car loans, student loans, mortgage) makes up a whopping 35 percent of your FICO score. Rolling over a credit card balance only forces you to spend money on interest instead of saving it and entices you to spend beyond your means.
Better Advice: Only open credit cards that offer perks you’ll use (hint: cashback!) and use them like debit cards, only spending what you have in the bank, and always pay off the monthly balance. This will help build a strong credit score in conjuncture with on-time payments on other lines of credit.
Bad Advice: College debt is worth it. This is more of an incomplete statement than bad advice. A college degree that causes debt could be worth it if the following career can pay off the debt and offer some level of job security. But many factors, like the economy, affect the soundness of this advice.
Better Advice: Research the expected salary of jobs your considering and how much debt you’ll take on to get your degree, the necessity of grad school, the compounding interest on your student loans, and the options for state vs. private school and community college. The cost of college debt may outweigh the possible benefits. Another idea is to calculate out what your payments will be post-graduation and see what you’ll miss out on by having to make those payments.
Bad Advice: A mortgage is always better than renting. A mortgage can be a smart investment in a home and real estate—at the right time, in the right place, and for the right price. Just because it’s a loan involving real estate, doesn’t mean it’s a for-sure bet for you at this moment.
Better Advice: Know the market where you’re considering buying and living. Image what your needs will be in the near future. Will you still want to live where you are now? Could work or life take you elsewhere? Know your budget; don’t buy more than you can afford. With all of this in mind, renting at a rate within your budget might be the best move for you right now. Renting means your money isn’t as tied up, you have more options should your needs change, and you can save for other things in life (assuming your rent is lower than a mortgage payment would be).
Bad Advice: Take on good debt, quick! The idea between good vs. bad debt is shaky at best. More accurately, the thing you are investing in might be good, but carrying debt actually inhibits you from other investments, like retirement, better health insurance, continuing education, etc.
Better Advice: There are occasionally good reasons to borrow money, but as soon as you shoulder the burden of debt, it can weigh you down. Instead, research your investments, understand if debt is necessary to obtain your goal, and proceed with caution. If you can, budget and save and pay with cash.
Bad Advice: Consolidate credit card debt by rolling it into refinancing your mortgage. There are several problems with this apparent “cure all” for runaway credit card debt. One—it keeps those credit cards open to be used again and to accumulated debt again. Two—it doesn’t teach good habits of self-control and budgeting. Three—it can mean you’ll pay much, much more in interest over the life of the mortgage.
Better Advice: Build a budget and work to pay off your credit card debt on your own. Negotiate a payment plan or lower interest rate with the credit card companies. This all helps engender self-restraint, teaches you about spending habits, and makes you more financially healthy overall.
Bonus Advice: Don’t let fees scare you from establishing a bank account. By being “unbanked,” you cut yourself off from many helpful financial tools. Investigate fee-free or better banking options for you, like using a credit union. Your deposits are insured, your money stays in the community, and you’ll have access to financial advisors, loans, interest-earning savings accounts, and more.