Paying off your debt. There are a thousand ways to do it, it seems, and everyone’s got an answer for you. But who, and what, should you believe? With so many options, how are you supposed to know what’s good money advice and what’s bad? A lot of it will have to do with what’s best for you and what you can handle. There are also those little bells that will go off when you hear something that might sound just a bit off. But sometimes, you’ll be given advice that seems perfectly logical, and a great way to get out of debt. Some of them are, and some of them aren’t. Below are the five biggest lies you’ll hear.
“A debt settlement company can help.”
Debt settlement companies will take over your full debt, negotiate on your behalf with creditors, and try to get you lower interest rates. What’s more, they’ll actually consolidate all your debt into one monthly payment and you will start to pay them instead of your creditors. They will use this payment to pay off your debt, and keep a little chunk of change for themselves. However, it’s not a good option.
Homeowners who are in a good deal of consumer debt can reduce the interest payments themselves by simply switching that debt over to a home equity loan or HELOC. This will give you the cash you need right away (through the loan) to pay off your debts, and the HELOC will come in at a lower interest rate.
Even those that don’t own a home typically have better options than using a debt settlement company – such as calling creditors themselves to do the negotiating.
“Just pay what you can.”
This advice just sounds wrong, doesn’t it? While a loan from the Bank of Mom and Dad might come with a “whenever you can,” repayment schedule, loans from actual creditors will not. Many people mistakenly believe (and tell their clients) that as long as you’re paying something on the loan, lenders will not put you in default status. The premise is that “at least you’re trying.” Not good enough. You need to make the full payments on any loan you have, or call the creditor to make arrangements. They’re not going to give you a pat on the head for that $5 payment you sent in.
“Carrying a balance on one credit card will improve your credit history.”
This one comes from a truth that got mixed up somewhere along the way.
Yes, if you’re trying to improve your credit score you should carry a credit card to show that you can handle some debt. But you should never carry a balance on that card! Make small purchases with it that you can pay off every month (in full!) and show that you can take on debt, and you can pay it back. Carrying a balance shows that you’ve only got half of that equation down.
“Your RRSPs can be a great way to pay off bills.”
Totally mistaken! RRSPs are there for your retirement, not to be used as extra cash flow. Not only will draining your RRSPs cause substantial damage to your financial future, the money is not as free as you think. While you can withdraw it at any time, if you do so before retirement, there will be hefty tax penalties that will counteract any benefit you got from taking them out in the first place.
“Close the credit cards you’re not using.”
Again, this one makes a lot of sense in theory, but it’s one that could help ruin you.
One of the ways your credit score is deduced is by determining whether or not you’re tapping into all the debt you have available to you. So if you have ten credit cards but only use one, that will work in your favour. If you only have one credit card that you always use, it won’t. Keep those unused cards, continue to ignore them, and watch your credit soar!
These are just a few of the most popular lies or misconceptions that are out there regarding how to get rid of debt, but there are more. Have you heard something that you just didn’t think it was true when it came to you and your debt? Or did one of the above make bells go off in your head, because you’ve heard them somewhere before? Let us know by commenting in the section below or liking us on Facebook!
