Last week, I mentioned snowballing your debt. (Be sure to take a moment to become acquainted with this method of debt reduction.) This week, I want to stick with dealing with debt, but by shedding light on some lies/myths we tend to believe about debt.
Our generation has the disadvantage of growing up at a time when we are told that we have to have debt in order to acquire things and that it is just a part of life. Most of us had our first credit card before we
out of college. I know I did! And I didn't even have a full-time job yet! Now, credit card companies are soliciting high school students.
If we want to stop the debt cycle, we have to face the truth.
Some myths: (as listed in Financial Peace)
Myth #1. If I loan money to a friend or relative, I will be helping them
Truth: The relationship will be strained or destroyed.
Myth #2. By co-signing a loan, I am helping out a friend or relative.
Truth: The bank requires a cosigner because the person isn't likely to repay. So, be ready to pay the loan and have your credit damaged because you are on the loan.
Myth #3. Cash advance, rent-to-own, title pawning, and tote-the-note car lots are needed services for lower income people to get ahead
Truth: There are rip-offs that aren't needed and benefit no one but the owner of these companies.
Myth #4. Playing the lottery and other forms of gambling will make me rich.
Truth: The lottery is a tax on the poor.
Myth #5. Car payments are a way of life, and you'll always have one.
Truth: Staying away from car payments by driving reliable used cars is what the typical millionaire does. This is how they became millionaires.
Next week we will continue looking at some common myths about debt and some credit card statistics. In the meantime, head over to Blissfully Domestic Forums to discuss.
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Love it! Telling it like it is. Perfection!
Gotta disagree with you on #2. A bank requires a co-signor because the signee is a RISK. That means a relative WITHOUT credit can be a risk.
We co-signed for my sister and brother in law when they were buying a house. They both had good jobs and had demonstrated their financial acumen, partly because they had paid cash for EVERYTHING in their young lives and had not built up ANY credit debt. They had no problem paying the loan.
Bottom line — know the financial situation of those for whom you'd co-sign AND be prepared to pay the loan.
I appreciate the general good sense in the piece, however number 3 is not as cut and dried as you indicate:
"There{sic} are rip-offs that aren't needed and benefit no one but the owner of these companies."
The fact is that without these institutions, poor people with no credit or bad credit cannot get financed. If such persons are using these services to their own detriment – that is their mistake, not the lenders. These people might need emergency funds for an operation, car problem or other situation. A normal lender will not give them money.
People who support laws controlling interest rates (not necessarily the author) are effectively denying the poor access to credit, while ignorantly and hypocritically feeling self-righteous and benevolent about doing so.
Ditto what Allison said about co-signing for family members.
Also, I have to take issue with #4. Your "truth" is a needlessly incendiary phrasing used in political situations by opponents of lotteries. The real truth is that no lottery is properly called a "tax," as they are not compulsory. Also, it is unfair to say that they are "levied" (to use taxation language) on the poor. Those who lack money-management skills may be more likely to gamble, certainly, but this is a chicken-and-egg issue. The truth is that those who want to gamble will do so, whether there is a state-sanctioned lottery or not. I am from Tennessee; our lottery is relatively young (about 5 years). Before it was instituted, droves of people flocked to Kentucky or Georgia to purchase lottery tickets, and illegal, underground "numbers running" was a major problem in many poorer communities. Now, the money is kept in-state, and the proceeds benefit university students (the lottery scholarship has allowed many, many Tennesseans to attend college when it would not otherwise have been an option for them), instead of the shady characters who used to operate the numbers rings.
I know your point was that one shouldn't count on gambling to bring wealth, but you phrased it in a very careless way.
(I am actually the one that wrote this article – not Mrs. Fussypants)
So I wanted to jump in on a few points.
Allison – what you said is basically what I was saying in the article (regarding myth 2)– yes, you may be helping them establish credit… but the gist of Financial Peace University (which is what my articles are based on — see DaveRamsey.com) there isn't necessarily a reason to establish credit. Purchases can be saved for. Wouldn't a family member/friend be just as well served being encouraged to save up money for the purchase rather than establishing credit that can cause a whole lot of headache down the road?
Colin – I've used these places before, so I know that they can get a person through a tight spot. But it is temporary — it is a bandage over the wound – not a cure! It creates a cycle. The interest is insanely high, and what happens the next week, when you've advanced your paycheck? Guess what? Your paycheck isn't going to cover the bills that week either… So the cycle begins.
You're better off working at saving money at any cost (even the risk of *gasp* having a payment be late) than creating that cycle.
Layla — The tax I am speaking of is not an actual TAX. I mean it is taxing to people. It takes money aways from other bills that need to be taken care of. It depletes money from savings. I know first hand the effects of gambling to "get rich". For the majority of people, it ain't gonna happen. The lottery preys on our idea of "Gettin' Rich Fast and Easy". But statistically and realistically?? Doesn't happen.
Thanks for sharing your thoughts everyone!
No… sometimes it is better to borrow the money at a low interest rate and have the equity of a house, especially when one is financially able to carry that responsibility.
My sis and bro-in-law had a 28% downpayment for their home and paid off a 15-year mortgage in 7 years and were still unable to get a loan without a co-signator.
This is one area I will always adamantly disagree with Dave Ramsey. Credit is a tool. Abuse it and it will hurt you. Use it correctly and it can help.
Dang, Karla! You're hardcore! : )
I've unfortunately been the beneficiary of loans from family members, and yes, it does put strain on the relationship; I feel guilty every time we're together. But I'm also incredibly grateful, and my family has been kind and generous in calling the loans 'gifts.' Definitely not your typical scenario.
My husband and I also bought our home as a lease-purchase, and while it was quite the bargain, it almost didn't work out that way because the landlord never intended for us to reach the point where we could purchase it.
I see what you wrote as cautionary statements…basically, if you know it's a snake when you let it in your house, you're the one to blame when it bites you!