The Truth About Bad Advice!
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We have all received advice from family and friends on how to best manage our finances. And, as many of us know, not all advice we receive is good advice.
In fact, when it comes to advice on how to better manage your finances, bad advice can abound. With this in mind, let’s look at some of the common misconceptions and falsehoods surrounding “sound” financial advice.
Refinance Your House to Pay Down Credit Card Debt
- If you’re struggling to pay off credit card debit, do not put yourself in jeopardy of losing your home as well.
- Typically, someone will refinance his or her home if he or she wants to lower the interest paid on a mortgage, and thus lower monthly payments. In some cases a person is even able to knock years off of his or her mortgage.
- However, refinancing your home to pay off credit card debt is not a good idea, as you would be converting unsecured credit card debt to a secured mortgage.
- So, if you end up defaulting on your mortgage you could end up losing your home as opposed to just a line of credit – which is all a credit card is.
- And remember, a mortgage refinance includes closing costs and fees so you could end up spending more than you want.
Use Balance Transfers to “Pay Off” Credit Card Debt
- A balance transfer on a credit card can let you take advantage of zero interest while paying off your debt, which is good, however, there are other things to consider.
- First of all, your credit score matters. Some balance transfers require excellent credit. So, if you have less than stellar credit the introductory 0% APR may be for a much shorter time period than those with a better credit history.
- Also, if you have a lower line of credit on the card in which you transfer your balance then, obviously, you may not be able to move all of your debt. As a result, you could end up with a high “credit utilization ratio” on the new card because much or all of the available credit is being used. This can and will impact on your credit score.
- Simply stated, do your research before using 0% introductory rates to transfer your credit card balances.
Pay Down Debt by Borrowing from your 401(k)
- Simply stated, borrowing from your 401(k) is rarely – if ever – a good idea.
- Taking money out of your 401(k) not only requires paying a penalty and taxes, but also results in a loss of earnings which will set you back on your retirement goals.
Making Monthly Minimum Payments Will Result in Having Great Credit
- Making consistent, monthly payments will definitely help you build good credit, however, paying off loan and debt balances in full is even better.
- Not paying a balance off in full results in APR charges, which grow monthly thanks to compound interest.
- For example, if you have a credit card balance of $6,194, which is the average credit card debt for Americans, at a rate of 16.61%, which according to the Federal Reserve is the average credit card APR, making minimum payments would result in the following dollar amounts actually being paid.
- Pay off $6,194 – $0 of accumulated interest
- Minimum payments for 5 years – $2,264 of accumulated interest
- Minimum payments for 10 years – $6,540 of accumulated interest
- Minimum payments for 15 years – $10,657 of accumulated interest
- What this information shows, is that after five years interest surpasses the initial credit card balance.
- So, the best option in establishing great credit is to create a budget which results in a monthly pay off of credit card balances.
It is Impossible to Rebuild Bad Credit
- Rebuilding credit is not impossible at all, but it does take time!
- Missed payments, late payments, bankruptcy, repossession, and foreclosure, undoubtedly, do have a negative impact upon your credit and will stay on your credit report for seven years. However, these credit factors do have less impact upon your credit score for every year that passes.
- Also know it is never too late to pay your bills on time and in full as a means of improving your credit.
- As previously noted, having a low credit utilization rate will also do much to assist you in credit improvement.
- And, in the event you feel this is not something you can do on your own, please know there are debt professionals as well as debt-relief attorneys whose mission is to assist in such efforts. In doing so, debt settlements can be made without doing damage to your credit score.
Debit Cards Can Help Rebuild Credit
- Simply stated, debit cards and credit cards are not the same!
- Debit card activity directly ties to funds available in a checking account – money you already have. Such activity is not reported to the credit bureaus and, thus, does not show up on your credit report.
- A credit card, by contrast, ties to a line of credit provided to you – money you do not have. Once this line of credit is used, it becomes a loan you owe to the creditor. This activity does show on your credit report.
As we know, the best things in life – walking, jogging, hiking, exercising, playing in the yard, hanging out with loved ones, conversation, worship, smiling, etc. – are free. Advice comes free as well, however, when wrong or misused it can result in very costly effects. So, when given financial advice be sure to do your homework to make sure what you’re being told is right!
Resource: https://www.cnbc.com/select/worst-financial-advice/