03 Feb Fact vs. Fiction
Most reasonable people here in the U.S. would agree that living in societal groups makes the responsibilities of daily life easier to handle. While good and bad both flourish, individuals share the benefits and burdens of the actions of others. In this type of a setting, people who jeopardize the safety, comfort, and rights of others are considered a threat and are often punished. What if it wasn’t an individual, but rather an organization or an entire institution that threatened the rights of the people. Recently, the three largest credit bureaus were charged, in a class action lawsuit, with violating the Fair Credit Reporting Act by “recklessly failing to follow reasonable procedures to ensure the accurate reporting of debts discharged in bankruptcy and by refusing to adequately investigate consumer disputes regarding the status of discharged accounts.” The result was a $45 million settlement.
In this case we can see how the entire credit industry harmed the American people. Fortunately, these credit bureaus were held accountable. However, there still remains a plethora of credit myths that could stop you from experiencing the benefits of having healthy credit. The FACTS below will “debunk” some of those myths with information to empower you to protect yourself from future credit casualty.
MYTH #1. Always keep a secret savings stash!…Your debt will always be there anyway.
FACTS: If you have savings, use it to pay off your high interest debt! In most cases this means paying off credit cards and car loans. This is because these types of loans carry higher interest rates than most forms of investment. For example, paying off a loan with an 18% interest rate is in effect, paying yourself a guaranteed 18% return on your investment! And it’s tax free!
To take this illustration a step further, let’s say you have $1000 which you are thinking of using to pay off a loan. You are also considering using the same $1000 to start a secret savings stash with your bank. The loan has an annual interest rate of 18% and the savings account will pay you 2% after taxes. Keeping the $1000 in the bank for one year will only earn you $20 in interest. Paying off the debt with the same $1000, however, will save you $160 in interest earning you a difference of $140 dollars!
MYTH #2. Refinancing will hurt my credit because of having my credit “pulled” also known as a hard inquiry.
FACTS: The process of transferring debt from a higher interest rate loan to a lower interest rate loan is known as refinancing. Clearly, it is in your interest to pay 9% to borrow money rather than paying 19%. If you currently have debt that you are not able to pay off entirely, applying for a lower rate credit card or loan can be a wise solution and help to maintain and protect your credit. Compared to the potential impact of unpaid debt, the effect of an inquiry will be minimal.
MYTH #3. Having several credit cards “looks bad” and can lower your credit score.
FACTS: Too much of ANYTHING can be bad. When it comes to credit cards, the trick is finding what’s right for you. Different card issuers offer different rates, fees, and other factors that will be appealing to you and your needs. Take the time to look for the credit cards that best suit your personal spending habits. If you are likely to carry a balance from month to month, go for the lowest interest rate you can find. If you always pay your balance in full, the interest rate may not matter to you. Rather, your priority should be features like little or no annual fees and a grace period which will allow you time to pay off your balance before any interest is charged. You may also find features such as special “rewards”, frequent flyer miles, merchant discounts, and cash-back on qualifying transactions.
MYTH #4. I know there’s a grace period…I may as well use it!
FACTS: Most lenders and credit companies do have a grace period. Whether they share this information with their customers or not, there is typically a time period within which they will accept payments without considering them late. Another piece of information that they seldom, if ever, share is that when you pay your balance in full before the actual due date you can often avoid ANY finance charges. Yes, you read that correctly. Many banks, lenders, and creditors offer an unadvertised grace period that allows you to enjoy, potentially, interest free borrowing! Be advised, however, that if you fail to pay even a small portion of your balance you risk losing this perk permanently. To minimize your interest charges pay your bill as soon as you receive it.
MYTH #5. With my credit, there is no way I would be eligible for a credit card.
FACTS: If you have yet to establish substantial credit or you have had trouble maintaining good credit it can be difficult to get approved for a standard credit card. Consider opting for a secured credit card instead. A secured credit card requires that you provide a collateral in the form of a deposit into a special savings account. The card issuer will allow you to charge up to the balance of the savings account. By demonstrating responsibility with a secured card, you will have less trouble with approvals for traditional cards in the future.