This is a guest post by Good Nelly who loves to analyze the day-to-day financial happenings along with critically analyzing the changing rules of credit, debt, insurance, mortgage, etc. related matters. She loves to share her analysis with others thus helping people to understand the exact scenario. The opinions in this article are attributed to her and her alone.
Being in debt is bad. But do you know what is worse? Having misconceptions about debt.
Approximately 99.9% of us have debts in some way or another. It is a necessity in today’s economy where people pay almost everything with credit cards. They also depend on student loans to get an education, mortgages for getting a new home, and so on.
If you have an affordable amount of debt, it can help you to attain your goals and live a comfortable life. But if your debt becomes uncontrollable, it may create huge problems in your financial life.
Having plenty of debt myths and misconceptions may lead you towards making wrong decisions. Those decisions may ruin your financial life and push you towards more debts. Keeping that in your mind, check out some common misconceptions about debts that you might need some explanation.
Debt myth #1- Late payments on credit cards will harm your credit score
If you make late payments on your credit cards, the credit card company may charge you late fees. They may also create interest charges. But credit card companies normally won’t report late payments to the credit bureaus until your bills are 30 days past due. If you have to make late payments, no harm will be done to you as long as you can afford the interest charges and late fees. But don’t make it a habit, unless you want to lose a good amount per month.
Debt myth #2– Making minimum payments on credit cards are good
If you only make the minimum payments on your credit card balances every month, you can’t imagine how much time it may take to pay off those credit balances. Month after month, you’ll have to pay the original balance, as well as you’ll pay interest charges. If you sum up the total amount, it may become way higher than the original balance.
You shouldn’t continue making only the minimum payments if you want to get rid of your credit card debts. Making minimum payments will generate interest charges and increase your total debts. So, make full payments every month as far as possible. If you face any issues, call your credit card company and negotiate for an alternative payment plan.
Debt myth #3 – Closing few credit cards or reducing credit limits will make the credit score sky high!
Absolutely wrong! Closing an old credit card means you are also wiping out an entire credit history with a decent credit limit. A bad credit history and a low credit limit can greatly affect your credit score. How? Let me explain.
While approving a new credit card, a credit card company will surely consider your FICO credit score. Older credit accounts may help you to build your score, because it has a long credit history to support your credit. When you close an older account, you lose the benefit of the credit history of that account.
If you close an old credit account, you are also reducing a decent amount of credit limit from your total available credit limit (all credit cards combined). Lowering credit limit will increase your credit utilization, and it’ll harm your credit score.
Debt myth #4 – Credit report can be repaired instantly by paying off debts
Another great misconception and the answer is will be a big ‘No’! Your credit report is an overview of your current financial situation and your credit history. So naturally, it’ll include all of your debts too. Paying off debts will improve your credit report and credit score, but it won’t remove the past black spots from there. Typically, most of the negative entries or information remain on your credit report for as long 7 years. Chapter 7 bankruptcy stays for 10 years and a Chapter 13 stays for 7 years. If you want them to be removed, you need to wait for that long.
Debt myth #5 – Getting married means more debt from your spouse
Most of the married couples believe that after marriage, they should always need to merge their debts. Practically, it’s not true. It’s quite common for a husband and a wife to work together and eliminate their debts together. But it is not a legal obligation for both of them.
Every individual has a separate entity when he/she are single. So why it should be different after the marriage? Couples should manage their own finances separately, as well as their debts. Of course, like an ideal couple, they can seek each other’s help at any point in time.
Of course, there are chances when a person can be obliged to pay his/her spouse’s debt after marriage. You could be responsible for a loan you have consigned with your spouse, or you have to pay the credit card bills where you have authorized your spouse as a joint account holder. It’s up to you, whether or not you want to sign up for the thing.
You and your spouse should always be on the same page when it comes to finances. Make a money date and create a working budget.
Debt myth #6 – All debts are evil and will damage your finances
Indeed, it is one of the most common misconceptions about debt. You might not treat it as a truth, but “good debts” exist. These debts will create some value in your financial or normal life, or in both. What are the examples? Check these out.
When you borrow money to start a business or to increase your net worth, it may be called as a good debt. Taking out a student loan can increase your knowledge and help you to get success in life. Thus, student loans are also considered as good debts. When you take out a mortgage, you are actually investing in an asset. After paying off the mortgage after 15 or 30 years, you’ll get a home with a higher value. So, it is also a “good debt’’.
But don’t forget that you must repay your good debts and keep your accounts in good shape if you want to prosper in your financial life.
Debt myth #7 – Bankruptcy is the coolest option if you want to get out of huge debts
Not at all. Bankruptcy should be your last option if you run out off other alternatives. To handle your huge debts, you might opt for popular debt repayment methods like debt consolidation program, debt settlement, taking out personal loan or loan from relatives, taking out a home equity loan or HELOC, withdrawing money from 401(k), etc.
A debt consolidation program combines your multiple debts into one single monthly payment and lowers your interest rate. On the other hand, if you opt for settlement by negotiating with the creditors, you can practically settle your total debts into a lesser debt amount. A successful debt settlement might ease up your debt load, but it may also harm your credit score, whereas debt consolidation doesn’t have much effect.
If you choose other debt repayment options, don’t forget to make payments on time and in full.
Debt myth #8– Credit counseling agencies are god damn blood-suckers!
Rubbish! A credit counseling agency is usually a non-profit organization who can provide you with debt help when you need it desperately. You might be able to handle your 2-3 credit cards quite easily. But what about a situation when you have multiple debts? In that situation, you might handle your credit card debts well, but what about other unsecured loans, bills? Who will help you? Who to talk to about debt!
Here a credit counseling agency will come to rescue you from the jaws of debt. Under a debt management plan (DMP), they’ll suggest you a repayment plan working with you and your creditor. By enrolling in a DMP and paying back debts through one monthly payment, you can repay your debts in full within a certain period. Enrolling in a DMP, through a credit counseling agency, will be added to your credit history, but it won’t hurt your score.
Being in debt is really difficult. Staying out of debt is even more difficult. Trust me, I get it! I have spent some time in the frugal trenches and I live on a tight budget so I get the struggle of being frugal-not-by choice!