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Have you ever read that there is such a thing as good debt and bad debt? There is some truth to that because there are several types of debt that can actually be considered good debt. The two biggest are a home mortgage and a student loan. The reason why they can be considered good it’s because they’re tied to an important asset that will increase in value – a house or an education. However, there are six myths about debt that are totally wrong but just won’t die.
1. Store cards don’t count as debt
When you check out of Macy’s, Kohl’s or some other department store and aren’t offered a store card then that clerk must be sleeping on the job. It’s just almost flat impossible to check out of a department store without being offered a store credit card. These cards can be very tempting because they often come with coupons, additional savings or some other generous offer. It can be very enticing to buy something now and not have to pay for it for 30 days. Unfortunately, most of us don’t pay off those store cards before the 30 days ends and interest kicks in. And when it kicks in, it can be a staggering 25% or even 30%. That may be enough to completely cancel out any savings you gained by opening the card. So, before you sign up for any store card make sure it will benefit you and not just the store.
2. Getting a personal loan to help with a down payment on a house is okay
If you don’t have the entire down payment to buy that dream house, then taking out a personal loan to help is a seriously bad idea. If the price of the home is out of your reach, that alone should be a good enough reason to not buy it. Mortgage lending standards have tightened up over the past few years and more and more lenders are checking the sources for down payments. They will want to see that the money for your down payment has been in your savings account for some period of time – and didn’t just arrive the week before last.
There are now even legal limits for using gift money as part or all of a down payment. The maximum now is $14,000 per individual. If you’re lucky and each of your parents agrees to write a check for $14,000 then that total gift becomes $28,000. However, you will need a gift letter proving that the money is actually a gift. And your parent or parents must be able to prove their ability to make the gift, which usually would be in the form of a bank statement.
3. You have just one credit score
You’ve probably read that you need to check your carbon monoxide and smoke detectors at least once a year and the same is true of your credit score. That little three-digit number shows prospective lenders how creditworthy you are or how likely you are to repay a debt. However, there are actually 50 different versions of your credit score depending on what sources of information are being used to calculate it at the time its pulled. These scores can vary by as much as 100 points. Since you can’t know which version of your credit score your bank, landlord or credit card issuer will see, you need to request at least three scores and then compare them.
4. When you get married your spouse’s debt becomes your debt
Before you and your intended tie the knot it’s important to sit down and discuss finances. As part of this discussion the both of you need to reveal the amount of your debt. In the happiest of circumstances, the two of you will have little or no debt. Unfortunately, its possible that your intended drops a credit card debt bomb on you. The question then becomes are the two of you responsible for it? There are two answers to this. The first is the legal answer, which is that in most states the person who acquired the debt is solely responsible for it before marriage. Her debt is her debt and his debt is his debt. But then there’s the relationship answer. If getting married means sharing all of your burdens that might mean sharing her or his debt as well. The important thing is that the two of you discuss this and agree on the answer.
5. Debt is a relationship killer
One of the biggest reasons why couples fight is over money. And it’s not uncommon for debt to be at the heart of the problem. Debt can cause stress on any relationship whether it’s between parent and child, husband and wife or roommates. However, what marital counselors have found is that it’s not debt that kills the relationship. It’s the misunderstandings that surround it. We all have different viewpoints about debt. The problem arises when those viewpoints are at odds. This can cause misunderstandings and tension that kill the relationship and not just the debt by itself. The best way to avoid these misunderstandings is for the two of you to sit down and discuss things before you do anything that would mean adding on debt.
6. Always use cash to buy a house
We might be fans of our state college’s football team but we’re no fan of debt. As noted above, one exception to this is a home mortgage. It’s different because it’s tied to an important asset that will appreciate in value in the years ahead and because of the mortgage-interest tax break it provides year in and year out. This makes a mortgage both worthwhile and attractive. However, this isn’t always the case. It’s critical that before you take out a mortgage you consult with someone knowledgeable and do the calculations to make sure that assuming all that debt is really a good idea. It will be disappointing if you find that you can’t afford to buy now but if you just keep building your nest egg that dream house will soon be yours.
