The first step of overcoming debt is believing that you can take charge of your financial life. The mindset that you can do something is powerful, and will lead you to actionable steps toward managing your money.
As consumers, we hear a lot of myths about credit and debt. For example, the belief that you must have debt in order to achieve good credit is a common misconception. As 18 to 25 year olds, we have a lot of big financial decisions ahead of us, and it is good to be equipped with the truth to rid ourselves of debt (or avoid it), and to achieve good credit.
Myth #1: You need debt in order to achieve good credit.
Truth: You can build credit by repaying your bills on time. Any 12-month history of repaying rent, electricity, oil, cable, or phone, can show an ability to repay. Lenders will look at whether you have a steady job and good income to evaluate your ability to repay. So...if you are looking to take out a loan, and want to build up your credit to ensure your approval, start by paying your bills on time, and landing a steady-paying job.
Myth #2: Debt-management companies or consolidation loans will save me interest and combine my installment loans into one smaller payment.
Truth: It is inaccurate to say that debt consolidation always "saves you interest and gives you one smaller payment." The truth is that consolidating your debt may save you little to nothing on interest because consolidating your loans means combining lower-interest-rate loans and higher-interest-rate loans. Tip? Be informed. Debt-management companies do not tackle the real issue of learning to handle your finances, they simply treat the symptoms of being in debt. Consulting with debt management companies or credit counseling may also negatively affect your credit score.
Myth #3: New cars are better than buying used cars.
Truth: New cars lose value faster than used cars - about 60 percent of their value in the first four years. The vehicle market has changed, and quality has increased, making used cars competitive viable options for consumers. Some newer-used cars come with a warranty and financing options similar when buying a new car.
Myth #4: Rent-to-own stores and leasing items are good options when you cannot afford to buy something outright.
Truth: Interest rates are sky-high on rent-to-own items. It is often better to buy new than it is to rent-to-own. The money you will pay in interest will far exceed what you would have paid by buying the items outright. For things like furniture and entertainment systems, look for used items on craigslist, at garage sales, or from people you know looking to sell.
Myth #5: Borrowing money online is safe and is the best way to secure a low-interest loan.
Truth: Borrowing money online is not better than borrowing from your local credit union or bank. If you are looking for a loan with competitive rates, find one at a credit union nearest to you.