Let’s talk about Bad Credit and Debt Management Advice. With the proliferation of social media platforms such as Facebook, LinkedIn, Google+, and Twitter in addition to online blogs, chat rooms, and other such personal online communication mediums, it’s a no wonder there is lot of misinformation and bad advice being exchanged about credit and debt management.
Following represent some of the best examples—and by best I mean worst examples of bad advice.
Best Debt Management Advice
Sign up for store credit cards to get the discount
If you are truly disciplined and fiscally responsible this is generally a good plan—however, most people are not. So what seems to make a lot of sense initially typically fails. In fact, any upfront savings realized at checkout are negated by the finance charges assessed each month because of an unpaid balance. In the end, the borrower ends up paying more than what was saved. Be leery of such a plan.
To qualify for a mortgage, don’t pay off your credit card balances
There is this belief among some that if you carry a balance on your credit card, it will help to build your credit history. Or, if you pay off the balance each month you won’t qualify for a mortgage. The fact of the matter is carrying a balance on your credit card(s) will not hurt your chances of qualifying for a mortgage if your credit utilization ratio remains favorable. And even if you were to completely pay off the balances, this (favorable) credit history will remain on your credit report for 7 years.
Don’t pay your ex’s part of the bills even if he/she doesn’t
If you have a joint credit card account, this advice could be extremely detrimental to your credit report and ultimately your credit score. Joint credit card account holders have equal responsibility to repay any debts charged to their cards. So before you agree to a joint card, know what you are signing up for.
Make money from credit card arbitrage
Credit card arbitrage involves borrowing money from your credit card, then investing that money in an instrument offering a higher interest rate or return than what you’re paying. Some will argue that it is a smart way to beat the credit card companies at their own game. Others claim it is a VERY risky venture because you are accumulating high interest debt with the potential of being unable to pay down the balance if your “investments” don’t pay off. Not a venture we recommend.
Avoid credit and debt all together
It is understandable why people want to avoid getting into debt or into credit trouble. However, how difficult would it be to buy a home or automobile, rent an apartment, get insurance, or even finance an education without it? For most, this just isn’t practical advice. Learning how to use credit responsibility is the better answer.
Invest your student loans
This school of thought is to use one’s student loan money to invest in high-yielding CDs with a rate of return higher than the student loan interest rate. When the CDs start to mature years later after graduation, you’ll have the cash flow to repay the loans, pocketing the difference. But there’s one catch—how will the student pay for tuition while in school?
Don’t save for retirement until you pay off your credit card debt
Some would argue to avoid investing into a 401k until one’ credit card debt is paid because a market return would never be greater than the interest being paid on a credit card. To begin, depending upon your investments and the amount of your credit card debt, your 401K could easily outperform the interest paid on the unpaid balance on your cards. Additionally, 401k contributions are pre-taxed and if there is a company match, chances are you’ll be way ahead of the game.
When making important decisions about your financial future, be sure to do your due diligence before making hasty or ill-informed decisions. Adopting bad credit or debt management advice could cost you dearly.