5 Myths About Debt Payments – Fact versus Fiction
By Julie Jaggernath
Do you know the difference between fact and fiction when it comes to debt payments? Whether you’re applying for your first credit card, or you’re a seasoned pro and juggle more cards than you care to admit, it is so much easier to spend money than it is to save it or pay off debt. And you might think, everyone uses credit; is owing money on your credit cards and other debts really a big deal? It sure can be.
Using credit wisely and as part of an overall money management plan is a lot harder than most people realize. Here are 5 of the biggest myths around debt payments, exposed and explained.
Myth #1 – Skipping Payments Isn’t a Big Deal
Skipping payments is a big deal. Not only is it a warning sign that you may need help with your debts, it might even be a deal breaker. Every credit obligation comes with terms and conditions, and you agree to them when you take on the loan. Part of the agreement spells out when payments are due, and if you skip payments, it will reflect extremely poorly on your credit report.
However, what many people don’t realize is that not living up to your payment agreement can cause a lender to call in the loan. This means that all future payment arrangements are cancelled, and you must pay back everything you owe immediately. This can leave you in a pretty impossible-feeling situation because if you had the money to make your payments, you probably wouldn’t have skipped them in the first place.
When payment arrangements are revoked with a credit card, it means the card is blocked and will only accept payments. With overdraft on a bank account, it means that the overdraft will be reduced and eliminated as you pay it down. When this happens, it can leave you short for other essential expenses, e.g. rent or groceries, if you had been counting on dipping back into your overdraft after having paid it down.
What to do when you can’t pay: If you can’t keep up with your payments, contact your creditor to see what they can do to help you. Be ready to outline your situation and provide a realistic timeline about when you’ll be caught up to date, or why catching up isn’t possible.
Myth #2 – They Won’t Lend Me More Than I Can Afford
When you apply to borrow money, lenders calculate how much they are willing to lend you based on your gross, before-tax income. This can be as much as 30% higher than what actually hits your bank account. And to make matters worse, the calculations by the lenders don’t account for some of the large expenses many people have, e.g. medical or dental costs, child care, costly habits, payments to non-traditional debts (i.e. payday loans, relatives).
You are the best person to determine if what you’re borrowing is affordable for you. Whether it’s a credit card, overdraft, loan, or mortgage, you can always borrow less than they want to lend you, or have your limit lowered. Only you know if your budget can afford the payments a lender approves you for. If they’re too high, ask the lender to bring the payment amount down. There are a number of ways they can do this. So make the decision that benefits you best in the long term.
Myth #3 – My Payments Fluctuate Because My Income Does; It All Works Out in the End
If your income fluctuates, you know how hard it can be to keep a steady budget. However, it is critical that you use a strategy to do just that so that you can keep up with at least your minimum required payments. Here are 3 ways to budget with irregular income.
Credit systems are not designed to take a 6-month rolling average. Missing a minimum payment will trigger a past due notice and put a mark against your credit file, even if you catch up with bigger payments every few months.
Special Tip! One of the best ways to budget with income that fluctuates is to set up a debt payment bank account. Based on your budget and how much your payments are, put money into the account as you get paid and stick to living up to your agreed upon obligations. This means that sometimes your account will have a larger balance, other times you’ll pretty much clean it out, but your debts will all be paid as agreed.
Myth #4 – Lenders Want My Money; Making Extra Payments Keeps Me from Blowing the Cash
While it’s true that lenders want you to repay the money you owe, depending on who the lender is and the type of debt you have, paying more than the agreed upon monthly payments might trigger a penalty. It’s definitely worth knowing the terms of each debt you have.
Some deferred payment plans or other types of loans provide initial incentives, e.g. a lower interest rate, loyalty points, flight miles, or merchandise, that are conditional upon you sticking to the agreed upon payment terms. Before entering into any credit agreement, always understand the repayment terms and conditions. If there is no prepayment privilege, verify how much you are paying for the duration of the loan by carefully looking over the disclosure agreements.
When it comes to mortgages, many cap how much you can pay on top of your regular payments each year, and there can be separate regular payment versus lump-sum prepayment privileges. We often can’t anticipate when/if we may receive a larger sum of money, e.g. inheritance, so check with your lender before assuming that you can pay any extra amount you want on your mortgage.
Myth #5 – They’ll Stop Calling Eventually, I Told Them I Can’t Make My Payments
Rather than trying to hide from what you owe, take charge and make a plan for how to tackle your situation. Ignoring bills, phone calls, and past due notices to avoid our creditors will usually only make a situation worse, not better. If you need help, contact a non-profit credit counselling agency in your area. They will help you outline a budget and plan how to get back on track.
Using Credit, Repaying Debt, and Managing Your Money
Loans and credit cards don’t come with user manuals; handling the resulting debt would be much easier if they did. When it comes to credit, debt, and money management in general, others only see what we let them see. What they aren’t privy to is the budget planning, financial juggling, decisions between needs and wants, balancing choices, fighting against our habits, staving off temptation spending, hard work, stress, worries, and sleepless nights. There’s a lot that goes into using credit wisely, and it starts with knowing the difference between fact and fiction.