For a young generation, millennials certainly carry a lot of debt. But this doesn’t mean that they should be resigned to being debt-ridden forever. In fact, millennials who resolve to tackle their debt now can set themselves up to be financially stable in the near future – and at a relatively young age.
If you are a millennial curious about debt relief, read on for three common misconceptions about credit and credit card debt that you might also hold.
Millennial Misconception #1. Maxing out your credit cards and carrying a balance will build up your credit score
Just because you have access to a certain amount of credit doesn’t mean you should use all of it. It’s a common misconception that you can improve your credit score by maxing out your credit card, but this can actually hurt your score because it results in a high utilization ratio (the percentage of your available credit that you are using at any given time).
It’s recommended that you keep your utilization ratio under 30%. It’s even better if you can keep it under 10%. For example, if you have an available credit of $10,000 across three different credit cards, you should aim to have, at most, $3,000 on those cards at any one time. If you consistently max out your credit cards, even if you pay them off in full every month, your credit score can take a hit.
In addition to your credit score being negatively impacted, it is not advisable to max out your credit cards because it is easy to get into the habit of relying on credit more than you should. If you consistently max out your cards to pay for daily expenses, you might one day realize you can’t pay your balance in full. If this happens, credit card consolidation may help you claw your way out of debt: However, it’s always preferable to keep your credit card spending to a minimum and only put an amount on your cards that you can comfortably pay back each month.
Millennial Misconception #2. You only need to pay the monthly minimum payment on your credit card
While it’s true that a minimum payment is just that – the minimum you are required to pay your credit card company every month – consumers should strive to pay their full balance, or at least more than their monthly minimum payments, every single month.
Many consumers believe that paying the minimum payment is enough, while in reality, it is a big mistake when it comes to your finances. Credit card debt, in particular, is a very expensive debt. If you fall into the habit of only paying your minimum balance, you will be paying a high interest rate on your credit card debt and the debt will continue to increase. By making only your minimum payments, it can take years (decades, even) to pay off your credit card debt.
Instead, the best practice is to pay off your credit card in full every month. This way, you will not be charged any interest at all. If you cannot pay it off in full, any amount over the minimum payment that you can pay is better than the minimum.
For some, paying off the monthly minimum balance just isn’t an option. In circumstances where you had been making minimum payments but are no longer able to make those minimum payments, on one or more cards, debt relief is an option. If you find yourself in this situation, work with a debt relief company to come up with a plan – like credit card consolidation – tailored to your needs.
Millennial Misconception #3. Bankruptcy is the only option to get rid of debts you cannot pay
Most millennials are familiar with the concept of bankruptcy. You might assume that it’s your only debt relief option if your credit card debt has become unmanageable, but this is simply not the case. In fact, bankruptcy is usually viewed as a last resort option.
Bankruptcy is a legal process that requires consumers to hire lawyers to navigate a proceeding before a U.S. bankruptcy judge. Typically, a bankruptcy filing results in a public record showing that you sought to discharge your debts through the bankruptcy process. It will also remain on your credit report for up to ten years, making it very difficult to obtain additional credit.
Fortunately, there are many other options, including entering a debt relief program. For example, you could work with a debt relief company to come up with a debt settlement plan by which the company will negotiate with your creditors, on your behalf, to reduce the amount of money you have to pay back.
Navigating Debt Relief with Confidence
Unmanageable debt can be stressful and intimidating, especially when the finance world is filled with misconceptions about it. Nonetheless, by understanding many of these misconceptions, as well as your debt relief options, you can position yourself to conquer your debts with confidence and clarity.