Common Debt Myths!

Debt Myths

Debt Myths

Most people have debt of some kind but many of us don’t understand how to manage it effectively and how to save money when it comes to debt. Unfortunately there are a number of common misconceptions or “debt myths” that have sprung up over the years, and those myths contribute to some people running into problems with their debt.

Debt can be complex and a few little tricks can make the difference between a stressful experience and a happy one. One example would be store brand credit cards and store finance deals. You may be able to access an interest free promotional period which sounds great, but often if you are still holding the debt once the promotional period is over you will have a significant interest bill.

The conventional wisdom is that you should use these interest free periods as much as possible, but people continue to run into problems when they are unable to pay the debt back within the allotted time. Are you certain you can pay the debt back within the interest free period? If not, then perhaps the store cards and finance are not a good idea!

We have gathered the most common “debt myths”, so check these out and see if you carry any of these common misconceptions!

1. After you get married you share any debt your partner may have

Incorrect! Many married couples decide to share their debts and pay them off quickly, but the reality is that your spouse’s debt is not your problem and you are not legally obligated to pay off any debt that was incurred before you were married.

Be careful about refinancing loans though, because once you refinance that debt is your responsibility. If you add yourself as a joint holder of a credit card or a loan you will also take on the responsibility of that debt. It’s always a good idea to understand how much debt your partner is in before you get married.

2. Credit cards from your favorite retailers are a good deal.

Not always! As mentioned in the introduction, these cards can carry clauses that make repayments very painful after the interest free period. For example, some store cards have a clause that if you don’t complete the repayments within the allotted interest free period, you must pay interest for the entire period of the loan, and the rate is high!

Some huge companies have these kinds of practices, even Apple has an interest rate of 20%+ if you don’t repay the loan in the interest free period. More than 20% on a laptop that costs $1500 is a significant amount and those kinds of decisions can lead to debt problems.

Stores always make these cards and financing deals sound very attractive but make sure you read the fine print!

3. Paying off my mortgage on time will give me a great credit score!

Incorrect! When calculating your credit score, on-time mortgage payments don’t add a lot of points, while missing a payment or two will subtract a lot of points! Positive payments do not help as much as missing payments, so don’t believe that because you paid your loan on time for 5 years, you can miss a few payments and it won’t affect your score badly. It will hurt it very quickly.

4. If you divorce, the debt will be equally separated

Getting a divorce does not change any of the arrangements you have made with lenders. So when you were married, if you signed your name to debt with your partner, that will remain in your name. If you signed your name to a larger portion of the debt, that larger portion will remain yours. You need to make arrangements with lenders about how the debts will be treated and you should make sure that during divorce proceedings you decide how these debts will be delegated.

Be especially careful when dealing with all of the various credit cards and store cards that you may have forgotten about or which your ex-partner still has access to. Some lenders will require that you close joint accounts, and some will require you to refinance your loans, so consider your financial position carefully before taking on this new debt solely in your name.

5. Car loans are tough to get because of the GFC

Nope! The GFC saw some tighter lending requirements being implemented for mortgages, but most car loan providers haven’t changed their lending practices at all. You can still obtain finance for a new car at a low rate, and in fact lower than in recent years.

6. Having a high salary and good credit score means you are offered the best deals on credit

This is a very common misconception. People believe that because they have their financial affairs in order, all of the credit card deals that arrive at your door will be of a higher standard with lower interest rates.

But that is not the case. Many of the deals look appealing because of all the extras like cash back deals and point schemes, but they still carry a high interest rate. Some of the “rewards rich” prestige cards like the Visa Black Card will carry a higher interest rate than a standard card. If you have your finances in order, negotiate a better deal with your credit card and take another look at low rate cards.

7. You know your real credit score

Many people have used an online service to find out what their credit score is, but is that the same score lenders will see? The problem is that there are many versions of the FICO scoring system and it is quite possible for a lender to be using a different agency to obtain your credit score and that agency might be using a different formula.

To get a better indication of what your credit score is, obtain it from a few different sources and look for fluctuations.

8. Buying your home with cash is a wise move!

Not having a mortgage sounds like a great deal right? Not always! If you are paying a mortgage, the interest payments can be deducted from your tax return. Also you may have missed an opportunity to invest that money elsewhere. You could invest that money in the stock market for great returns over the next few decades and having extra cash on hand might come in handy if you run into trouble with your job.

If you can find an investment that has a greater return than the interest rate you would pay on a mortgage, then it makes sense to invest the money.

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