Conventional wisdom teaches us that a debt-free life is a better path. While it’s generally true having fewer financial obligations is more liberating, there’s also such a thing as good debt. Student loans, business loans and home mortgages are examples of money borrowed with tremendous upside.
Knowing how to separate facts about debt from long-standing misconceptions is very important in your financial life. It empowers you to stay away from pitfalls while giving you flexibility and confidence to borrow at the right situations. To increase your awareness, here are six of the biggest debt myths and insights on how you should approach them:
- You can marry into debt.It’s a common misconception that once you get married to someone who has debt, you are required by law to take it as your own. Not true. Even without the benefit of a prenuptial agreement, a spouse’s debt obtained before marriage is his own, and you are not obligated to pay it off. However, whatever debt your husband or wife incurs inside your marriage can become your responsibility even if the account is not under your name.
The same holds true if you unfortunately decide to get a divorce. Repayment of loans made while you were married may be divided between you and your spouse, regardless whose name is on them. Lawyers advise to pay off all debts before the divorce becomes final, or if both are willing, to only be obligated for a debt under his or her name. Whatever you decide, the terms must be committed into the terms of the agreement.
- There is only one credit score for all types of loans.People think that when they refer to credit score, creditors are looking at only one kind. This is not true. Although these companies may be using FICO as a resource, there are actually as many as 60 different types of FICO scores, and they may be looking at a particular one (or several) depending on the type of loan you apply for.
For instance, you wish to apply for a mortgage. Lenders will most probably request three FICO scores from three major credit bureaus and compare them to see if you are qualified to pay off the loan. While these scores may be within the same range, there are those who ignore collections received below $100. When this happens, a person’s credit score for that category may be higher than those who consider these types of collections.
- It is better to get a credit card from your favorite retailer.Although it might seem like the better deal, store cards are actually deceiving. Sure, you can save by signing up for a card and using that to purchase goods in that store, but it might not all be better in the long run. Most retailers offer a “buy now, pay later” scheme with zero-percent interest for 30 days to a few months, which looks appealing on paper. However, if you are unable to pay the balance within the allotted period, you get the “added benefit” of paying higher interest charges than the typical credit card.
For example, you buy a laptop from a preferred brand. The store may offer you an 18-month repayment option without interest if you purchase using a specific credit card (usually offered by them directly). If you are unable to meet even one monthly payment for whatever reason, the deal may revert back to the previous interest rate and can go as high as 25% to 30% (compared to about 15% for variable-rate cards).
- Buying a house, as opposed to taking a mortgage, is always the best option. To many, it may seem like a no-brainer to pay for a house in cash (if they have it) instead of getting a loan or mortgage. This is not always the case: while paying for a house in hard-earned cash may free you from monthly payments, a mortgage can actually be an appealing prospect because of mortgage-interest tax breaks.
It’s best to study which of these options is the better financial choice for your situation. You may consult an expert to gauge whether or not a mortgage can translate into bigger savings.
- You can get jail time if you refuse to pay.Debt collectors cannot put you in jail if you are unable to pay your loan. It is illegal for collection agencies to threaten to have you arrested or file criminal charges. Also, once the statute of limitations has passed in your state, you have no legal obligation to pay this debt. However, creditors can still file a lawsuit, so it is best to consult your lawyer or a debt specialist. If this happens, you and your legal counsel will need to show up in court to prove that the statute of limitations has expired.
- Debt collectors can keep calling you even if you tell them to stop.There are actually some truths to this statement. While debt collectors are no longer allowed to call you if you verbally request them not to do so while you are at work, they can still contact you at home or your mobile phone. The only way you can get them to cease completely is if you put the request in writing and make sure they acknowledge receipt of your letter. If they don’t stop, you can report the collection agency to the Federal Trade Commission.
Hopefully, exposing these myths has given you greater clarity on matters surrounding debt. As long as you know your rights, you can save yourself from a lot of stress – and save yourself some money along the way.
To learn more about debt relief solutions and how to start living with financial freedom, contact CreditAssociates for a free consultation or use our Savings Estimator to see how much you could save.