10 Greatest Myths about Credit and Debt
by STEVE RHODES and MIKE KIDWELL
If I don't use credit I'll never be able to buy anything. Reality: If
you don't use credit, you won't have debt. Remember when people used to
pay for purchases in cash? If you want something bad enough, save for
it. It is significantly more rewarding to purchase something and own it
outright than to create another liability.
Credit is bad.
Reality: Wrong. Credit can be used for many good and worthwhile
purposes, such as buying a home. Credit cards are very convenient when
making purchases as long as you have the money to pay off the credit
card bill. Credit is like many other things in life: When used
incorrectly, it can hurt you.
I'm a loser and a failure because I'm in financial trouble.
Reality: You have to accept responsibility for your actions and remember
that you did accept the credit with the promise of paying it back. But
most families and our schools do a poor job of teaching financial
responsibility. How many classes did you take while growing up that
taught you how much credit you should accept? Maybe the truth is that
you did make a mistake and got in over your head because you didn't know
better. If you can learn from this mistake, you are neither a loser nor
a failure. Accept your setback, learn from it, and move on.
If my debts get to be too much I'll just file for bankruptcy.
Reality: Bankruptcy is a very serious matter and should be a last
resort, not an easy ''out.'' It is a legal case filed with the
bankruptcy court that is a matter of public record, and it can be
reported for the rest of your life if you apply for certain loans, life
insurance or jobs. Many people who have filed bankruptcy wish they had
tried other alternatives before filing. Once you file, you will always
be ''a person who filed bankruptcy,'' and you can never take that back.
The credit card companies wouldn't send me applications in the mail
if I couldn't afford it.
Reality: Wrong. The credit card companies are simply making you an offer
based on mailing lists or research they have performed. It is your
responsibility to determine whether you can afford to accept their
Everything is okay because I pay the minimum payment due each month.
Reality: By just paying the minimum payment on a debt, you extend your
payments for many years. If possible, send more than the minimum
payment. If that isn't possible, you are probably living close to the
financial edge. What would happen if you were injured or sick or could
not work? Simply being able to live from paycheck to paycheck is not a
sign of financial well being.
I can wrap up all of my credit card debt into a home equity loan and
my interest will be tax-deductible.
Reality: You have just placed your home at risk and could lose it if you
fail to make your payments. Nobody ever plans not to be able to make his
payments. The reason the lender uses your home collateral is so he can
take it from you if you default on the loan. As for the tax deduction,
who knows whether the interest will be deductible for the life of the
loan? Credit card interest used to be deductible but no longer is. Are
you confident that home equity interest will always be deductible?
It's okay if I take a cash advance to keep me from falling behind on
Reality: Some people take cash advances on their credit cards to pay
their other creditors ''on time.'' It is better to accept a late payment
than to borrow your way deeper into debt, just to pay for bills you
can't afford. What often happens is you put yourself so deep in debt
that it is nearly impossible to improve your situation without
significant negative marks being made on your credit report.
If I co-sign a loan, the lender will never come after me.
Reality: You co-signed for the loan, which means you promised to repay
the debt if the borrower couldn't. When the borrower is unable to pay
back the loan, you are on the hook. Unless you are prepared to repay the
loan when the borrower defaults, you should never co-sign any loan.
My financial condition is so bad that my situation is hopeless.
Reality: Although your problem may not be solved in a way that you would
envision, a resolution can always be found. Open your mind and be
realistic about your options. Ultimately, you have to choose a solution
you are most comfortable with