Common Misconceptions About Debt

Though we are bombarded with messages about money through the Internet, television, magazines, our friends, our co-workers—there are still many misconceptions surrounding debt.  Here at ComparedForMe.com, we have pulled together the most common misconceptions that we have found and put them in one central place.  Read below to see how knowledgeable you are about debt!

Making your monthly minimum payments will get you out of debt fast

Many consumers believe that when they pay the suggested minimum payment that their credit card recommends, they are taking big steps towards paying off their total balance.  WRONG! Credit card companies purposely set low minimum monthly payments to make you feel like you’re in control of your payments.  The problem is, you then feel encouraged to spend more, when in reality, you are racking up monthly finance charges.  Paying the minimum payment is certainly better than nothing; however, it is important to realize that you’re probably only paying 2% of your balance, which barely covers the interest.  Do your best to pay as much as possible every month to reduce your overall balance.  Use the minimum payment as a type of “in case of emergency” suggestion from the credit card company.  Remember, they are trying to make money off of you!

Checking your credit report will lower your credit score

Checking your credit report will not lower your credit score.  As mentioned in a previous post, it is important to know the difference between “soft” and “hard” pulls.  A soft pull occurs when you, a potential employer, or any card issuer you have an account with checks your credit report.  These soft pulls do not have any harmful effects on your credit score—so you don’t need to worry about them!  It is your right as a consumer to check your credit report as often as you see fit.  Hard pulls, on the other hand, do have a harmful effect on your credit score that could last up to 6 months.  Whenever you apply for a credit card or open a new account with a bank, this is considered a hard pull.  The good news is, a hard pull can only be made with your permission—so pay attention to the fine print when you’re signing anything related to new accounts.

Once you pay off late payments, all negative marks immediately disappear from your credit report

We hate to break it to you, but negative marks on your credit report remain there for 7 years.  This is not meant to make you panic; rather it is a reality that you have to face.  Negative marks appear on your credit report any time a payment is 30 or more days past due.  If you occasionally miss a payment, your credit score will not tank—it will tank when you move into the 60 and 90 days late arena.  Avoid this whenever possible!

Debt management will lower the total amount of money you owe

When you are considering debt relief help, credit counseling is one of your options.  A credit counseling agency will help you manage your debt by setting up a repayment plan that will help you pay off your bills in anywhere from three to five years.  The agency negotiates a lower interest rate on your behalf, which results in a lower monthly payment.  Creditors are then forced to stop harassing you for payment, as you have agreed to pay a certain amount each month.  The credit counseling agency is essentially your new debt collector.  You will be taking small steps towards paying off your entire balance, not eliminating the debt all together.