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Financial literacy is key to achieving financial stability. There’s no better time to start learning about it than when you’re young — though it’s also never too late.
For Gen Z, most of whom are still in school or just starting out in their careers, it’s doubly important to make sure they start learning about personal finance as early as possible. That way, they won’t end up making big financial mistakes that could have been avoided.
One particular area that’s worth learning about is debt. There’s a lot of information out there, but not all of it is necessarily good or even accurate.
Here are some of the most prevalent myths about debt that could seriously hurt Gen Z’s finances if they keep believing them beyond young adulthood.
All Debt Is Bad
Contrary to popular belief, not all debts are automatically bad.
“This principle prevents young adults from understanding the leveraging power and strategic use of debt,” said Michael Hills, CFS, CIS, a financial advisor at Apex Wealth. Some good forms of debt, Hills said, include taking out a mortgage to buy a home or investing in a business. This is because of both can be used to achieve long-term financial goals or even build wealth.
“While staying out of debt is a good rule of thumb, it’s important to understand good debt vs. bad debt. For example, collateralizing one’s brokerage account in low interest rate environments can make a lot of sense, assuming [you] are comfortable with the risks,” said Nick Marino, CEO of Breakaway Wealth.
With any type of debt, including “good” debt, you’ll still want to make sure you can handle the financial responsibilities that come with having it. This includes making any payments on time and being aware of how interest rates and other fees affect your finances. If you keep on top of your debt, you can even use it to build credit, which can help you later in life as well.
You Don’t Need To Pay Student Loans During School
Many Gen Zers are either currently attending college or deciding their future education plans. Higher education typically means taking out student loans — federal and sometimes private.
If you believe you should wait to start tackling those student loans until after school, you may want to reconsider. Yes, it can be difficult to hold a job and attend college full time, but waiting to pay off your debts until you graduate won’t be any easier. This is especially true if you plan to get a place of your own and have to start paying other bills.
But you don’t have to pay off all your loans while still in school. Even small payments can make a huge difference in your financial situation.
“While you may be able to defer your student loan payments until post-graduation, making payments while in school can help you reduce the total cost of the loan and save you money in the long run. Even as little as $25 a month can help reduce the overall cost of the loan,” said Angela Colatriano, chief marketing officer at College Ave.
Colatriano also said that it’s important for Gen Z students to be aware of what their loan payments will look like and to come up with a realistic plan to pay them back. This will make handling them much easier in the long run.
Student Loans Don’t Impact Your Credit Score
Another common misconception is that student loans have no impact on your credit score. The reality is that they can affect your credit just like any other loan, which is why they need to be taken just as seriously.
“Your credit score is a combination of your credit use, debts and payment history, so make sure you are making your student loan payments on time and in full each month,” Colatriano said. “If you run into a problem, reach out to your student loan servicer for help.”
There’s a Right Way To Pay Off Debt
Lots of debt payoff methods exist.
One popular strategy is the debt snowball method, which involves paying off the debt with the smallest balance first while paying your minimums on all other debts. Once you’ve gotten rid of the first debt, the goal is to then use that extra cash to tackle the next-highest debt and so on. Another option is the debt avalanche method, which works similarly except you prioritize paying off the debt with the highest interest rate first.
While some people believe there’s a right way to pay off debt, that’s just not true. Some debts are much worse to have than others — regardless of balance or interest rate.
“There are certain creditors that are much worse to keep on the books; for example, the IRS (tax debt) or credit card companies,” Marino said. “These should almost ALWAYS be the first debts to attack, as student loans and mortgage debt offer various protections and are more lenient with collections efforts.”
Credit Cards Are Dangerous
Credit cards can be dangerous if you start racking up your balances. But used correctly, they can be a great way to earn points for things like travel, get cashback rewards or even build credit.
“While credit cards can lead to debt if not managed responsibly, they are also essential tools for building a credit history, which is crucial for securing loans, renting apartments and even getting certain jobs,” Hills said.
The most important thing is to make sure you pay off your credit card balance in full every month before interest can start to accrue. Don’t just pay the minimum amount due. That will keep you from getting into debt that you can’t afford or missing payments, which can hurt your credit score.
All Credit Cards Have High Interest Rates
Many Gen Zers are cautioned against using credit cards, largely due to their high interest rates. But not all credit cards have such high rates.
“There are cards built with college students in mind, such as the Ambition Card from College Ave,” Colatriano said. “There’s no credit check to qualify, no interest or late fees, and you earn cash back on your purchases. Plus, your on-time payments are reported to the credit bureaus, which can help you build your credit history.”
Other major credit cards also come with an introductory period with no APR. As long as you don’t carry a balance on your card when that period ends, you can generally use it without incurring interest charges. There may be specific terms to this, though, so keep an eye out for those.
A 15-Year Mortgage Is the Best Option
If you’re starting to think about getting a home, you’ve probably heard that 15-year mortgages are the best option. After all, they have a shorter repayment term and lower overall interest charges.
But the best mortgage term is highly dependent on you and your financial situation.
“While 15-year mortgages will provide lower interest costs, a 30-year mortgage will provide much greater flexibility in the event of job loss or income reduction,” Marino said. “Many of my clients obtain 30-year mortgages, but then will ‘double up’ on payments. While the interest cost is higher, for many folks the flexibility and peace of mind is worth it given how rapidly life changes.”
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