Many aspects of personal finance and debt can be confusing to the layman. Half the time, you feel like you need a degree just to understand a tax return or the fine print on a contract. Managing your debt effectively and knowing what to and what not to do can be equally confusing. But it doesn’t need to be. Here we examine five debt myths to separate fact from fiction.

Myth #1: You need debt counselling

Debt counselling has benefits - advisors can help you formulate a realistic budget and ensure that you make your payments on time if you are really struggling. But, given the wealth of information available to you online, it’s easy enough to do this without actually going for debt counselling. Beyond understanding that you can sometimes restructure debt with a lender, getting out of debt really comes down to self-discipline, and you shouldn’t need someone to help you with that.

Myth #2: Debt is a tool that can be used to create prosperity

Debt and prosperity sit on opposite sides of the wealth spectrum and certainly don’t work in tandem. People who are well off generally don’t have debt (unless it's a mortgage). Debt is really reserved for those who don’t have the freedom to use their money as they please, and most South Africans are so far in debt that it will be a real challenge for them to get out of it! Credit can help you build a credit score and can give you access to money when you really it, but it is not a tool for prosperity.

Myth #3: You need to eliminate all debt by retirement

In an ideal world, it would be great to have settled all your debt, especially your mortgage, by the time you retire. But for many people, this is almost impossible, and in some cases it is even undesirable. Your mortgage can give you access to cash at a low interest if you really need it, and it might make sense to paying it off in full if you think you still need access to credit in the future. 

Myth #4: It’s OK to make minimum payments 

Don’t think that just because it is lawfully ‘ok’ to make minimum payments on debt that you should do so. This only extends the life of your loan, which ensures that you accrue more interest and fees - making it more expensive than if you paid it off over a shorter period. Likewise, if you have a credit card, you should aim to pay it off in full every month.

Myth #5: If you are deep in debt, your only option is bankruptcy

You should only ever consider bankruptcy if you have exhausted all other options. Two such options are debt review and a debt consolidation loan. Debt consolidation involves combining all of your loans into one larger debt consolidation loan. This option makes repayments easier and can lower the cost of your debt if used correctly. Another route is debt review, which involves having a debt counsellor assess your debt and implement a restructured debt repayment plan. In this case you often have to adhere to a revised (and stringent) personal budget.

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