Five misconceptions about debt
Debt is a complicated topic, and there is a lot of information and misinformation out there related to credit, debt, and debt collection practices. How are you supposed to separate the real facts from half-truths? We have all heard credit card myths and misinformation. I cannot promise to dispel all of these myths, but I can address a few of the most common ones. Read on for the truth about five common credit myths.
1. Closing a credit card will improve your credit score.
It's understandable how this has become a common myth. It is reasonable to assume that you would have a higher credit score if you reduced the number of credit cards, because large numbers of credit cards are supposed to equal a low credit score. The problem? Credit scores don't quite work that way. The number of credit cards you have is not as important as you would think. Closing a credit account reduces your available credit. This can actually hurt your credit score.
2. If a family member dies, you can be held responsible for his or her debt.
This is not necessarily true. The only way that you can be held responsible for their debt is if you shared a credit card, a mortgage, or a car in both of your names. It is typical for a deceased person's debt to be paid out of his or her estate — not passed on to surviving family members.
3. Debts over seven years old are automatically removed from your account. Or the reverse: all debts can indefinitely remain on your credit history.
In the case of the "seven year" myth, it really depends on the type of debt: Late payments and old collections are usually removed from your credit report after seven years if you no longer use those accounts. But they would still be on your report if you are still paying on them. Some debt can remain on your credit report for a lot longer than seven years. For example, bankruptcy can remain on your account for 10 years, and student loans stay with you for life.
4. Debt collectors will leave you alone if you agree to pay a small amount.
It is common for debt buyers to purchase companies' old debts and try to collect on them. And they often use underhanded tactics to get you to pay or at least to acknowledge the debt. Once this happens, you can be held accountable for the old debt. It is best to refuse to discuss old debts with debt buyers. You should request documentation of your debt.
5. Checking your credit report hurts your credit.
This isn't true at all. There are two types of credit checks. A hard inquiry is what happens when you apply for a credit card or buy a house. This type of inquiry might lower your score a little. A soft inquiry is what happens when you check your own credit report, and this inquiry does not affect your credit score in any way.
So, there you go: the real story about some of the most common myths regarding credit and debt. I hope this clears up some of the confusion. You will have an easier time managing your finances if you know more about how debt and credit work.