When you were a kid, what was the first thing that came to mind when you heard the word “debt”? Chances are it was someone sitting at their dining table surrounded by bills. Or a person getting kicked out of their house because they were bankrupt. It conjured up images of prison, destitution, and hopelessness.
That is some people's experience of debt, for sure. But what we simplistically imagine when we are younger gives way to a more nuanced understanding. When you have a credit card, you have debt – at least until you bring the balance back down to zero. And we're okay with that, too. But we should be careful. You can get into problematic debt that endangers your family future without noticing it's happening – because there are things people don't tell you about debt.
1. The minimum payment on your credit card is not your friend. As long as you're making it each month, you will not get hit with late payment fees. That's fine. But if you have a card with, say, a balance of $2,000 and you only pay the minimum payment, you'll be debt free in … 2046, maybe 2047.
2. Credit accounts with major retailers are a big risk. Yes, they lure you in with offers – pay nothing for the first six months. The first year! 18 months! But then, when you do have to make payments, the interest charges are punishing. It doesn't feel like you're spending real money, initially. But you are – it's just not yours.
3. Some companies calling themselves “debt management experts” are nothing of the sort. You want to avoid anyone calling themselves a “debt settlement agency”. They make a profit off supposedly negotiating the best deal possible with your creditors. In reality, by going with a debt management plan, you can find out how to arrange your payments more reasonably, and just pay an admin fee.
4. Bankruptcy is neither a black hole nor the light at the end of the tunnel. It's often painted as one or the other, but the facts are as follows. You don't get to wipe out all your debt, but you can hold off recovery activity. Depending on where you live and what form of bankruptcy it is, you should be able to keep your home. But you may well have to sell off assets. And interest still accrues on some debt, including student loans.
5. People will try to pursue you for old debts. But depending on the state you live in, that debt may be too old to be legally recoverable. And this is the important bit: Don't make a one-off token payment to hold off activity. The statute of limitations (which ranges between four and six years depending on location) begins when you last made a payment to it. So when you make a token payment, you start that clock again.
6. You may be told that paying off a debt means it rolls off your credit record. It does not. Once collection activity commences on a debt, it is on your credit record for more than seven years. So whether or not you pay it off makes no difference to your ability to get another loan or credit card. You can write to the creditor and ask them to have the debt-struck from the record. But it's up to them whether they do that or not.