Common Debt Myths and How to Avoid Them
Wednesday, October 22, 2014, 1:00 AM | Leave Comment
Although debt allows for smart borrowing and financial security, many borrowers perpetuate myths about credit scores, mortgages, and credit card payments. Understanding common debt myths and how to avoid them will help you have a stronger financial portfolio and will prepare you for success.
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Mortgage Down Payments
One of the most common forms of debt, mortgages, are still the most confusing for American borrowers.
The myth goes that the more money you have for a down payment, the lower your mortgage amount and monthly payments will be.
While this wisdom holds true for money you’ve accrued through working, if you borrow the money from friends and relatives to put a larger down payment on your home, your finances may be put under more scrutiny, ultimately leading to a higher monthly payment.
If banks don’t think that you’re able to pay your mortgage with your current income, they may ask for higher payments to insure against the workaround you found by borrowing money from your family.
Make sure you have enough saved for a mortgage before applying for a loan to avoid more costly monthly payments.
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Credit Cards from Retailers
At face value, credit cards from popular retailers seem like a fantastic deal. Often, retailers offer 0% APR to new signups or for particular product purchases like a new iPhone.
The problem with these cards is that in the fine print there is typically a clause that outlines harsh penalties for outstanding balances outside of an introductory period.
In most cases, these credit cards have 6-12 month introductory periods where penalties are not imposed, but after this period, APRs up to 23% can be leveraged against shoppers.
You can avoid these penalties by avoiding carrying a balance on retailer-sponsored credit cards and paying off the entirety of the balance before the end of the month.
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Your Late Payments Won’t Affect Your Score
A myth surrounding credit card payments is that one late payment will negatively affect your credit score.
While late payments are never desired, a single late payment that goes a few days or weeks past the due date will probably go unnoticed.
Payments that are long overdue and intentionally missed are the ones to watch out for.
Credit card companies understand that mistakes happen and missed payments on occasion happen to even the best borrowers, but missed payments that go long unattended will eventually make their way onto your credit report.
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Your Credit Score is Wrong
Finally, there’s a good chance that the credit score you think you have is different from the one that will be pulled by companies trying to issue you new lines of credit.
Because of how FICO scores are calculated and adjusted, sometimes payments below a $100 threshold and larger forms of credit like a mortgage or car loan aren’t counted.
The credit score you’ve requested from one credit agency may vary from that of another agency, so expect some discrepancies in your score when talking to a new credit issuing agency.
If you are struggling with debt, you may need to hire a professional. Professionals like Abakhan & Associates Inc. can help you understand these debt myths and assist you with your own personal finances.
If you are in debt, you don’t want to go through it without having all of the facts straight and your ducks in a row.
Debt is already no fun to be in and it is even less fun if you are going about it all wrong.
Keep the myths above in mind if you are struggling with debt and be sure to get help and your wallet will thank you for it.
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