4 Credit Myths and Debt Misconceptions Debunked
Plenty of debt misconceptions and credit myths exist today, and that's a shame since they can lead folks to make decisions that aren't in their best interests. With that in mind, here are four popular credit fallacies that you've probably heard and deserve some clarification.
Myth No. 1: Carrying Debt Is a Bad Idea
Despite the stigma around debt, being a borrower isn't something you should be ashamed of, especially when you use debt wisely. Mortgages enable you to live in a home that will hopefully appreciate in value, for instance, and student loans give you the means to invest in yourself.
Using credit cards gives you the chance to prove you can borrow responsibly by paying your bills on time, and when you do, your credit score improves. High credit scores will make financial institutions feel more comfortable lending you money, and you could qualify for more favorable loan terms and interest rates.
Likewise, noncreditors including electric utilities, home insurers, cell phone companies and landlords may also be interested in your credit score, according to the Consumer Federation of America. Keep in mind, however, that if you consistently have a sizeable amount of credit card debt compared to your line amounts, it can possibly negatively affect your credit score.
Myth No. 2: Keeping a Credit Card Balance Will Improve Your Credit Score
This one's not true. One actual way to increase your score is by using a small portion of your available credit. Making on-time payments every month will also help, as will using a diverse mix of credit types, like credit cards, a car loan and a mortgage. Interest will accrue on outstanding balances, and you'll be saddled with debt for quite a while if you only pay the minimum required. If you can pay off your monthly balance, you should.
Myth No. 3: It's Wise to Close Credit Cards You Don't Use
Actually, not only should you keep old cards that are paid off, but you should also use them a little to maintain activity. The reason goes back to your credit score and a factor included in its calculation called the credit utilization rate, which compares the amount of credit you're using divided by the total credit available to you. If you kept charging the same each month on two cards but closed a third (cutting off access to its available credit), the ratio would increase and could negatively affect your credit score. FICO offers an example. But, if that old card has an annual fee, you have another variable to consider.
Myth No. 4: You Should Pay Off Your Mortgage as Quickly as You Can
This statement is a misconception only when interpreted in a one-size-fits-all form. For many, accelerating payments is a savvy strategy. Mortgages are huge debts, and wiping them away can relieve a major source of stress and financial burden, especially if you're nearing retirement.
Still, rushing to get rid of a mortgage isn't the best choice for everyone. Some factors to consider include:
- Would you be better off investing the money toward extra payments?
- Are the tax benefits of the mortgage interest deduction important to you?
- Would retiring your mortgage early mean you'd have to sacrifice other important goals like paying off your credit card balances each month or socking away savings for other needs?
Being able to recognize these and other credit myths and debt misconceptions isn't always easy, but doing so can give you the confidence to make smarter financial decisions today that can affect you tomorrow.