Originally appeared in boundless.org
Good debt, bad debt — here’s what you need to know.
Is all debt bad?
There are so many questions. The topic of debt can be confusing, especially with friends’ opinions, myths and misinformation floating around.
You probably have heard people explain their debt by saying, “But it’s good debt.” OK, maybe sometimes. But doesn’t that sound about as straight forward as a dietician explaining “good fat”? Really? Good and fat? Hmm.
Funny thing is both debt and fat are easy to accumulate, yet both are hard to eliminate.
So we encourage you to avoid debt if you can and be on guard for the following six myths about debt:
Myth 1: A family loan makes home ownership easy.
Buying a house before you can afford it is kind of like a super-sized version of buying any large item you can’t afford — on credit. If the price is out of reach, there might be a good reason not to purchase.
Some families loan their adult children the large down payment for a house. For some this isn’t an option, and for those able, it may not be a good option. More and more lenders are checking sources for down payments with the tightened lending standards. They want to know that the down payment has been in your account for a period of time.
There are legal limits on gifting. Right now the maximum is $14,000 per individual. (If each of your parents writes a $14,000 check, the gift total becomes $28,000.) Lenders will require a Gift Letter verifying the funds are, in fact, a gift, and the donor must provide proof of their ability to gift, usually in the form of a bank statement.
So because a family loan isn’t as easy as it sounds, we recommend that you thank your folks, but decide whether you, personally, are ready to purchase a home.
Myth 2: Store cards don’t count as much when it comes to debt.
Almost every time we check out at a department store, we are offered a store credit card. Often additional savings or coupons or the moon are included in this generous offer to sell us more plastic and potential debt.
Buying the item now without any interest for 30 days sounds enticing. But most people don’t pay off those balances before the interest kicks in. CBS Money Watch reports the average American credit card debt is $7,200.
But if you feel you can hold yourself to paying off the bill before the interest begins (and those coupons won’t tempt you to spend when you don’t really need anything), sign up for a store card. But be careful. Interest can be as high as 25 or 30 percent retroactively dated to the time of the purchase.
Make sure the store card is a true benefit to you, not the store.
Myth 3: You have one credit score.
It’s always a good idea to check on your credit score. If you’re going to change the smoke detector batteries each year, why not take a look at your credit score, too?
Your credit score is a numerical evaluation of your credit worthiness — a number indicating how likely you are to repay your debt. Your score is based on information received from credit bureaus. Usually lenders, landlords, and even mobile phone companies use this score to determine who qualifies for a loan, the interest rate associated, and what the credit limits are.
But locating your credit score isn’t as straightforward as stepping on a scale and seeing that teeny tiny number. There are over 50 different versions of a credit score. Scores can vary by as much as 100 points between those 50 different sources. With no way to know from where your lender or landlord might pull it, a good idea is to request at least three scores and compare them.
We recommend checking your credit score twice a year. Some people check quarterly, but more often is unnecessary.
Don’t worry that checking your credit score will adversely affect your credit score. Personal inquiries are considered “soft inquiries” and are recorded, but never negatively affect your score.
Myth 4: Always purchase a house with cash.
You can tell by now we are not fans of debt. The Ohio State Buckeyes? Yes. Debt? No. But purchasing a home is a financial proposition different from almost any other transaction.
Often the mortgage-interest tax break you receive each year makes the loan attractive and worthwhile. But not always. Please do your calculations or consult with someone knowledgeable to determine if assuming debt to purchase a home is a good idea.
Carefully evaluate your financial situation. If you can’t afford to buy a home now, you can continue building your nest egg.
Myth 5: In marriage, your spouse’s debt becomes your debt.
Meeting with young couples is such a treat. We love to hear how they met, their amazement at God’s timing, and about their dreams for the future.
Recently, we met with a newly engaged couple. The room was filled with the usual laughter and fun as we started discussing relationships and finances until she revealed for the first time EVER she had $40,000 in credit card debt. Ouch!
Money surprises can be hurtful surprises because money is so personal. So what happens if your fiancé drops the credit card debt bomb on you? Are you responsible for that debt? There are two answers to that question: the legal answer and the relationship answer.
From a legal perspective, in most states the person who acquired the debt is solely responsible for the debt they racked up before the marriage. His debt is his. Her debt is hers. But from a relationship perspective, you are responsible to one another.
If you are going to marry and become one, you’re committing to each other “for richer or for poorer.” You will stand before everyone and commit to share your burdens, which includes financial ones, too.
So if “the” question gets popped, you might want to pop a few more about debt.
Myth 6: Debt kills relationships.
Debt doesn’t kill relationships; people kill relationships.
We hear it all the time: “If we just didn’t have all this debt, then we wouldn’t ever fight, and all of our money problems would go away.” Or you think, If I had a better job so I only had one roommate to deal with, I wouldn’t be so mad about how things are turning out.
We know it’s not true that debt kills relationships because the decades of research we’ve conducted reveals that most people experience tension with a roommate, a friend, or a mate over the misunderstandings surrounding money, not necessarily the dollars and cents of it all.
For example, a single woman feels like her parents don’t have faith in her abilities when they offer to pay for things she can clearly afford. Or she feels her suggestions to save money for all the roommates isn’t honored when they won’t cancel cable and they continue to buy the expensive brands of food and cleaning products. She insists if they weren’t driving her into debt, she would enjoy spending more time with them.
Money isn’t killing her relationships; she is killing her relationships. We all view money differently. Often those viewpoints are at odds. The different viewpoints cause tension and misunderstandings, and kill relationships. Identifying and appreciating those differences saves relationships. Avoiding debt saves your budget.
Prayerfully consider any arrangement that saddles you with debt.
One of the original wise guys, Solomon, reminds us, “The rich rule over the poor, and the borrower is slave to the lender”.
We’re interested in your perspective about debt. Do you have one? Leave your comment below.