Debt is an interesting topic that gets spoken about a lot, and yet very little is understood about it. Your basic knowledge of debt is that debt is bad, and it means you’ve spent too much money. However, when looking below the surface, you realise it isn’t as simple as that. Debt is far more complex, and there’s a lot people never tell you about. This leads to some common misconceptions that might fuel poor financial decisions.
You don’t want to make poor financial decisions, and I certainly don’t want you to either. So, let’s talk about the things nobody ever tells you about debt!
Not all debt is bad
You’re conditioned to associate debt with something bad. However, some debt is actually thought of as good debt. We’re mainly looking at things like buying a house or taking out a student loan to fund your education. These things are considered good debt because they provide you with something beneficial. Yes, getting a student loan gives you thousands of pounds of debt. But, it also provides you with a strong education that can lead to a much better job and a prosperous future. Splashing the cash on a new build apartment lands you with a hefty mortgage that takes years to pay off. Still, you now own property and can make money by renting it out or selling it for a higher price.
Good debt exists, so don’t assume that owing money automatically means you’ve made a bad financial decision.
Bankruptcy can eliminate your debts
There are two main types of debt: secured and unsecured. Secured debts are ones where you have an asset used as collateral against your debt. Basically, if you fail to pay it off, your assets can be seized and sold to make up the money. This debt is almost impossible to eliminate, as creditors can just take your assets. However, unsecured debt can be removed by filing for bankruptcy.
A lot of people don’t know this because it’s rarely discussed! If you become bankrupt, all of your unsecured debts are eliminated, giving you a fresh start. Of course, you shouldn’t instantly jump to this solution as bankruptcy has consequences. But, it’s good to know that there is a get-out clause for people so heavily in debt that they can’t live their lives.
Debt positively and negatively impacts your credit score
Debt is a key factor in your credit report. Most people know that it can negatively affect it. The more debt you have, the worse your score will be. Also, if you fail to pay debts or miss payments all the time, this also harms your score.
On the other hand, a small bit of debt can help you build a better score. Credit cards are a great example of this as you borrow a small amount of money each month, then pay your balance in full. This shows you keep up with payments and have excellent credit utilisation. Thus, your score will slowly improve.
Hopefully, you’ve learnt some new things about debt from this article. It’s not always bad, but avoid borrowing too much money! A good rule of thumb is to think about the longterm benefit before you borrow any money.