Eight Debt Myths Debunked
The world of finance can be confusing – almost everyone has an opinion on it which leads to lots of uncertainty into what is fact and what is a fable. We’ve attempted to expose some of the most common misconceptions surrounding debt and credit.
Credit cards are bad for your credit score
Provided you handle them sensibly, the opposite is actually true. Making small purchases and paying them off in full at the end of each month helps to build your credit score. However, failing to make these repayments can negatively affect your score, so use with caution.
A guarantor loan is the same as a joint loan
A joint loan is where two or more people are equally responsible for making repayments for the duration of the loan term. With a guarantor loan, the borrower is fully responsible for the repayments, the guarantor would only be asked to step in, should the borrower be unable to.
If I make a late payment, it will affect my credit score
While making a late payment isn’t a practical way to handle debt, it won’t be detrimental to your credit score. However, missing consecutive payments could cause the account to default, at which point the lenders are required to report to the Credit Referencing Agencies which will impact your ability to obtain credit in the future.
Paying back my loan early will save me money
In principle – this is true, though be sure to read your loan terms and conditions carefully. Some lenders may charge you a fee for making overpayments or settling early. However, this is limited to two months’ worth of interest, so it would cost you less than if you continued to make your regular repayment until the loan ends.
Entering a debt management plan will cost me even more money
Debt management plan services do exactly that – they help you manage your debt. While most companies do usually charge a small fee for their service, you usually won’t be asked to pay this upfront. There are also a number of charities who offer the same service for free, however, they tend to have a lot more customers to deal with meaning things might take a bit longer.
If I don’t make my loan repayments, they’ll take my house/car/business
Unsecured loans do not require you to put up any collateral, so your property is not at risk. Only loans secured against something such as a house are at risk of being possessed and this is always the last resort for lenders.
I have never had any debt so my credit score is perfect
Believe it or not, this is actually not the case. Lenders use a person’s credit history to judge the likelihood of them repaying the money, and consequently how much of a risk it would be to lend to them. If a person has no history to base this decision of, they are often assumed to be high risk and therefore offered a higher rate of interest or rejected altogether.
If I move abroad, my debts will be written off
While moving to another country will make it harder for lenders to chase you, it won’t make the debt go away. There are a growing number of debt collection agencies who are able to trace people abroad and it may also affect that persons ability to return to the UK in the future.
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