There is a lot of talk and advice about money online—and not all of it is good! While the internet has made information more readily available than ever, it’s also made a lot of misinformation available, too. This has resulted in the spread of a lot of money myths over the years.
A myth about money might be based on a misinterpreted factoid, something that only applies in a specific country, or an actual lie meant to trick people into making a mistake. Whatever the origin of the financial myth, it’s important to recognize it for what it is: incorrect information.
Common Money Myths to Watch Out For
What are some of the more common personal finance myths that you should watch out for? In this blog, we’ll explain some of the incorrect information about money that you might find online:
Money Myth 1: All Debt Is Bad Debt
It’s easy to understand why this financial myth has spread. There are some people who, understandably, hold the position that all debt is bad debt. While debt can be detrimental to your finances, holding a small amount of the right types of debt can actually be good for your credit score.
When comparing good debt vs bad debt, it’s important to consider how the debt may impact your future earnings potential or net worth in the long run. Two examples of good debt would be mortgages and school loans.
Why are these “good” debts?
- Mortgages. At the end of a mortgage, you’ll have a large and valuable asset—the home. Since real estate tends to go up in value over time, you might find yourself with a property worth more than what you initially paid for it.
- School Loans. A higher education increases your earnings potential. So, school loans can be considered a “good” debt since your labor value (and your job options) may increase when you get a degree.
“Bad” debts are those balances you incur for things that won’t provide a long-term value. One example that might surprise you is the auto loan. Why are auto loan debts bad? Because, the value of a car typically decreases significantly after you buy it—sometimes as soon as you drive it off the lot!
Other forms of bad debt include things like credit cards and payday loans. These debts could represent spending beyond your means if you have large balances.
Having some debt (or utilisation, as the credit bureaus like to call it) can be a good thing. It helps build your credit history. However, any form of debt, when taken to an extreme, can be crippling.
Money Myth 2: Insolvency Is the Best Way to Get Out of Debt
For any person, insolvency is a tool of last resort to get out of extreme debt. It should not be treated as the “go-to” option for eliminating debt. Instead, insolvency should be avoided unless circumstances are truly dire. That bankruptcy is a “get out of debt free” card is one of those common money myths that contains just a kernel of truth while glossing over the consequences of insolvency.
There are many major drawbacks to filing a consumer proposal or a bankruptcy proceeding:
- It Devastates Your Credit. Insolvency is a huge red flag to credit bureaus. Since credit events stay on your record for seven years, you can expect your credit score to really suffer for at least that long. This may make it harder to get certain financial services (such as mortgages, credit cards, or loans) at favourable rates.
- You Could Lose Your Stuff. Another reason to avoid bankruptcy is that your creditors could be allowed to take your assets and sell them to recoup their losses. While there are limitations on what they can take, you could lose a lot of your stuff.
- Employers May Not Want to Hire You. While an employer cannot fire you for declaring bankruptcy, a company could take a look at your financial history and choose not to hire you in the first place. Some industries look at applicants with financial trouble and see them as major risks (e.g. banking, real estate, insurance, etc.).
Before resorting to insolvency, it might be better to investigate your other options—such as getting a debt consolidation loan or joining a debt consolidation program (DCP). A DCP may impact your credit, but to a much lesser degree than a bankruptcy or consumer proposal.
Money Myth 3: You Only Have to Worry about One Credit Score
A lot of people might take a look at their credit report and assume that that’s all they need to know—that one number that lets them know what their score is. However, this is one of those credit score myths that can, under certain circumstances, come back to bite you.
The thing is that, in Canada, there are actually two national credit bureaus: Equifax Canada and TransUnion Canada.
Both of these credit bureaus might have different information on their credit reports about you. For example, one might have an incorrect event listed that says you missed a credit card payment or something similar while the other doesn’t. This could result in one credit bureau’s score being significantly lower than the others.
Alternatively, small differences in the way that each bureau weighs events on the credit history could also result in somewhat different scores. Believing that you only need to know one is a personal finance myth that could cause issues when you try to sign up for a loan or credit card in the future.
So, it’s important to check your credit report with both bureaus and look for any discrepancies. While it isn’t always easy, disputing a negative event on a credit report (that doesn’t belong there) can help you avoid a low credit score. This could make it easier to qualify for financial services later on and help you get more favourable terms.
Money Myth 4: I Can Inherit Debt from Someone Else
This is a money myth that’s born from a misunderstanding about debt after death. Normally, you cannot inherit debt after someone else passes away—even if that person is your partner, parent, or child. Your debts won’t pass on to anyone else when you die, either.
What creditors can do is go after the estate of the person that was in debt—which may include having the executor of the estate sell off assets to collect the money that was owed to them—before any inheritance is paid out. In some cases, the money owed can be paid out from the deceased’s life insurance policy without impacting their other assets (if they have a sufficiently large policy to cover their debt).
Another situation where you might be held responsible for the debt of a deceased person is if you co-signed for a joint bank account, credit card, loan, or other financial service. In that case, you are considered to have accepted responsibility for any debts related to that account as the co-signer.
This is why it’s important to avoid co-signing for any financial service unless you can completely trust the other co-signer not to rack up debt (or are able to exert strict control over the account to prevent a large growth in debt).
While inheriting debt is a financial myth, some creditors and collection agencies have been known to propagate this myth about money and debt to try to trick the unsuspecting into paying for balances they don’t owe.
Money Myth 5: You Can’t Get Credit Counselling if You Make Too Much Money
Credit counselling is a service that should be available to anyone, regardless of their age, education, or socioeconomic status. That people with high-paying jobs can’t (or shouldn’t) seek help is a myth about credit counselling. Worse yet, such money myths can keep people from getting the assistance they need to make it through a tough patch in their lives.
Remember: there is no maximum income that you can make before you’re cut off from seeking help with consolidating your debt or managing your debt repayment strategy. That’s just an untrue financial myth.
While high earnings can help prevent the accumulation of debt from emergencies, even people who make massive amounts of money can fall into debt—there are even famous celebrities who have fallen into debt in the past!
So, the “I make too much to qualify for counselling” statement is a money and debt myth that you shouldn’t believe. Even the rich and famous might need the occasional bit of help managing their debt.
Money Myth 6: You Can Go to Jail for Having Too Much Debt
You will not go to jail if you have a large outstanding balance that you owe someone—regardless of what a collection agency might threaten over the phone. This is a financial myth that you shouldn’t have to worry about at all.
That you can go to jail for being in debt is one of the most ridiculous money myths in circulation. While “debtor’s prison” was something that existed in some older justice systems, there is no such institution in Canada.
However, a collection agency could take you to court over your unpaid balances. They could even have a formal judgment against you to garnish your wages so they can start collecting money. This is usually used as a last resort by creditors who are worried that you might skip out on the whole balance.
This is because filing a lawsuit in court can be extremely expensive. In fact, a survey of Canadian attorneys stated that it can cost over $10k to file a lawsuit. So, normally, a creditor won’t go to this extreme unless they have a very large amount of money riding on the outcome.
Even then, you may be able to stave off a court date by working with your creditor to set up a payment plan—or at least taking the time to communicate your situation and why you cannot pay right now.
Where Should I Go for Debt Counselling and Advice?
If you’re looking for debt counselling help, Credit Canada is here for you! Our certified Credit Counsellors have helped many people deal with their debt through a combination of debt management advice, referrals to various debt relief resources, and our own debt consolidation program (DCP).
If you’ve been comparing different credit counselling agencies, but still haven’t found one that provides the right combination of support and confidentiality, contact us! Or, give us a call at 1.800.267.2272 to get started on your debt relief journey.
We’ll happily discuss your situation, walk you through the financial myths that might be holding you back, and walk you through your debt relief options.