Myths about Debt

Bankrate.com has listed 10 myths about bankruptcy.

Speaking of myths, what leads to bankruptcy is believing the myths about debt. So... here is my list of 10 myths about debt.

1. Debt consolidation saves interest, and you have one smaller payment. The truth is debt consolidation is dangerous because you only treat the symptom of a deeper problem - addiction to a lifestyle you can't afford. You also increase the amortization time to pay off the principle and you pay a LOT more interest when all is said and done. If you pay it off early, you paid a much higher interest rate if you paid "points" on the loan.

2. Debt is a tool and should be used to create prosperity. The truth is that debt adds considerable risk to you financial well being, and may not bring prosperity but bankruptcy. It isn't used by wealthy people as much as people think. Forbes magazine lists the "Forbes 400" richest people in America. In a survey of these people, 75% indicated that the best way to build wealth is to pay off all debts and stay out of debt.

3. If I loan money to friends or relatives or cosign on a loan for them, I am helping them. The truth is that loaning money strains the relationship, and can destroy it. The only way around this, if you want to help, is to do an interest free loan and be willing to forgive it if they are unable to pay. When you cosign on a loan, you'd better put it on your balance sheet as if it is your loan and keep room in the budget to make payments, because you may have to start making the payments. Also, it will show up on your credit report and affect your credit score.

4. Cash Advances, Payday loans, Rent-to-own, Title pawning, and Tote-the-note car lots are needed to make credit available to the lower-income people to help them get ahead. The truth is these loans are at interest rates that will send them to bankruptcy faster than anything else. These are predatory lenders designed to make fortunes robbing the poor of basic necessities.

5. Car payments are a way of life, you'll always have one. The truth is we borrow to buy a car because we can't afford the car in the first place. Staying away from car payments and driving a dependable used car is what the average millionaire does. That is probably how they became a millionaire.

6. Leasing a car is what sophisticated people do, because of the tax advantages and the declining value of a car. The truth is if you calculate the real numbers you will find that it is by far the most expensive way to operate a car, including the tax benefit. They also entice you to get more car, since the payments may be lower than on a car loan. You would spend even more.

7. You should get a credit card to build your credit. The truth is a credit card is more dangerous to your credit rating than its worth. Not to mention the agreements are impossible to avoid default in some small technical way that allows the credit card company to siphon off your hard earned money with higher interest and fees. You also can still get a mortgage to buy a home without having used a credit card. You paid rent on time, right? The idea is to minimize debt, not pave the way for more debt.

8. You need a credit card to rent a car, check into a hotel, or buy something on the Internet. Hogwash! The truth is you can do all that with a debit card. These days the merchant doesn't even have to know the difference. For merchants who do take debit cards, you may still find it cheaper to tell them it is a credit card, because the debit card fees are usually higher. However, don't use a credit card because it is debt, and is riskier to your financial well being. A debit card won't get you in debt.

9. A debit card is riskier than a credit card. The truth is VISA has a zero liability policy, you just have to report the fraudulent activity within two business days. If you miss the deadline, you are still only liable for up to $50. Plus, if you want to avoid the hassle of getting a potentially large sum of money back while they "investigate". Simply isolate the debit card to it's own checking account and limit the amount of funds that can be withdrawn. Make sure you write a letter to the bank and keep record of it. Tell them that you want the "overdraft" account they automatically open for you closed. That way any charges that overdraw the account will be rejected, and there is no check bounce fee.

10. If no one used debt, our economy would collapse. In reality it would prosper more than it is. The pain of going cold turkey would be hard to swallow, but would pay off in the long run. This is taught in our schools by economics teachers, which brainwashes our children into believing it is good for them to spend and borrow to keep the economy healthy. That is like saying to a drug addict - "keep taking drugs, so you don't feel the pain of withdrawal". The fact is we are addicted to debt, and breaking an addiction is very painful.

There are so many other myths, I could go on. However, this is my list of 10 debt myths.