5 Bogus Beliefs About Credit and Debt
The truth will set you free — in this case, free of debt.
In this business, we routinely encounter myths and false beliefs about many financial subjects. I consider it part of my mission to correct them, although sometimes it feels as if I’m playing a game of Whack-a-Mole: One pops up, I knock it down, and another pops up.
But we’ll keep at it.
So, here are five bogus beliefs that many people have about credit and debt, according to Money Management International, a nonprofit credit-counseling agency. Let’s set the record straight on each of them:
- There is an easy way to fix bad credit. Wrong. Some TV and radio ads claim their sponsors can “fix” or somehow improve your credit report in a few easy steps — for a fee, of course. The truth is that no person or company can remove accurate entries from your credit report. The Fair Credit Reporting Act says that information about a delinquent account (late payments, nonpayments) can remain on your file with the credit reporting agencies for seven years, starting 180 days after the account becomes delinquent.
Many so-called debt-settlement firms leave consumers worse off than when they came to the firms for help. According to the Department of Justice, only one person in 10 who goes to such companies emerges debt-free. The rest wind up deeper in debt and with worse credit scores than they had, because the companies charge them high fees to set up an account, then monthly fees, and sometimes the companies take some of the money that was supposed to be used to repay the debt.
Some of these outfits tell you to stop paying your bills, claiming that companies won’t negotiate with you while you’re still making payments. Don’t believe those statements. Not making payments will only cause you to incur more fees, higher interest rates — and lawsuits.
To find a list of legitimate, government-approved credit counseling organizations, visit usdoj.gov/ust.
- Bankruptcy discharges all debts. That’s simply not true. A number of debts don’t go away through bankruptcy, including back taxes less than three years old, student loans, child support and debts incurred through fraud. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires you to complete a counseling course before you file for bankruptcy.
- Debt collectors can’t call others (family, neighbors, etc.) about your debts. As unfair as it may seem, actually they can. The Fair Debt Collection Practices Act allows debt collectors to make such calls, but there are a few restrictions: They can call others only to find out where you live, your telephone number and where you work. They can’t reveal the reason for the call to anyone other than you or your attorney. And unless you tell them otherwise, they can call you at work, which means they will.
- A divorce decree matters to creditors. Again, that’s wrong. That decree is between you and your ex-spouse; the creditors are not involved. While the decree may state how your assets and debts will be divided, the creditors were not involved in the settlement and had no input in the results. Therefore the decree doesn’t change any contracts with them. Whoever signed the contract with them is still obligated to pay the debt, regardless of the divorce or its decree. If payments are not made, the creditors can sue the debtor and file the negative information with the credit agencies.
- Your credit card company can’t change the interest rate you pay. Actually, according to the Credit CARD Act of 2009, card issuers can indeed make key contract changes to your account terms and agreement, including rate increases, with 45 days’ notice. Many will raise your interest rates if your credit score declines — even if you have paid on time and according to the terms of your contract.
These are only a few examples of misinformation about credit and debt. We’ve seen just as many myths about workplace retirement plans, Social Security, college loans, mortgages, car loans and a host of other topics.
Before you act on what you “know,” verify your information with us. We’ll make sure you’re acting on valid information, not inaccurate assumptions.
Originally published in Inside Personal Finance May 2013
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