It seems like everyone from bloggers to your next-door neighbors dishes out financial advice these days. It can be difficult figuring out who to believe, and bad tips can pop up as frequently as thunderstorms in the summertime. In fact, some seemingly sensible advice can turn out to be a bad idea of the highest magnitude, and some “conventional wisdom” really isn’t. Even widely held beliefs can turn out to be clunkers, as this roundup from financial experts illustrates.
1. Don’t Use a Debt Settlement Company: Debt settlement firms make an appealing pitch: Contract with us and we’ll chop your debts for you. Just funnel monthly payments to them instead of your creditors and they’ll battle the banks on your behalf, they promise. Debt settlement companies also collect and hold onto payments for a period that can be as long as several months before they start the actual settlement process, which means borrowers have to endure months’ worth of phone calls from bill collectors and run the risk of being sued for nonpayment in the interim.
2. Don’t Just Pay Whatever You Can: A lot of people think that paying any amount owed on a debt acts as a good-faith effort and that creditors are obligated to work with you if you pay a nominal sum of, say, $5. This isn’t true. There’s no such thing as getting an A for effort when it comes to delinquent debt. Borrowers who get in over their heads need to reach out to the creditor and work out a payment plan both parties agree to — and get it in writing.
3. Don’t Carry a Credit Card Balance to Improve Your Credit Score: Although it is important to use your credit cards regularly so that timely payment activity gets recorded on your credit report, many people mistakenly interpret that to mean that they have to revolve a balance from month to month for this usage to count on their credit score. While carrying a balance doesn’t hurt your credit, it can be an expensive mistake, because it costs you money every month in the form of interest on those borrowed dollars. If you carry a balance of greater than 30% of your credit limit on any one card, your utilization ratio may be too high and your credit could suffer.
4. Don’t Drain Your 401(k) to Pay Bills: Tapping retirement funds to pay off unsecured debt should be a last resort that comes only after a borrower has considered all other options, including bankruptcy. It’s deceptively easy to view retirement funds as a piggy bank that will solve a debt problem. Consumers are not prepared for the future tax liability based on the fund withdrawal. In addition, without an overhaul to a borrower’s spending behavior, the underlying financial problems are unlikely to be resolved.
5. Don’t Close Unused Credit Card Accounts: Many people believe that keeping credit cards they don’t use is a liability to their credit score, so they close them. In fact, hanging onto cards that you rarely or never use can boost your score. A key component of your score is to practice self-control from tapping into all of your available credit. Lenders want to see that you have access to credit but the financial discipline not to exploit it. Closing open accounts will actually hurt your score by skewing your credit utilization ratio, which is the percentage of your available credit being used at any given point. The exception to this, is if you’re unable to control the urge to splurge. Leave accounts open and use each one at least once a year for the highest score effect.
6. Don’t Stop Paying Your Mortgage: Some people claim that defaulting on a mortgage will put homeowners in the express lane for mortgage modifications. This is a horrible, horribly expensive misconception. While it’s true that some government-backed mortgage modification programs are available only to people who are delinquent on their mortgage payments, it’s still a bad idea, similar to wrecking a perfectly good car because you want 0% financing on a new vehicle. Skipping mortgage payments torches your credit score and lets the creditor pile on the penalties — which you’ll still be stuck with even if you do get a modification.
The biggest risk is that you’ll fail to get a modification; many foreclosed-on homeowners tried in vain to get a modification and wound up losing their house anyway. What’s more, most modification programs available to delinquent borrowers only affect interest rates and loan terms rather than lowering the principal, which mitigates the financial relief.
7. Don’t Tap Home Equity to Pay Unsecured Debt: People who are hounded by credit card or medical bill collectors might think that taking out a home equity loan to pay those debts is an easy way to stop the annoying phone calls. Be warned: This is very dangerous to do unless you have a good spending plan in place, and determination to keep it. Otherwise, you may end up with a home equity loan and credit card debt, and could find yourself in a place where you can’t pay it all. Think this sounds bad? That’s not the worst of it – you are taking unsecured debt and making it secured, which means you could lose your house if you can’t pay it.
Read the entire article at: http://moneyland.time.com/2012/08/23/terrible-financial-advice-top-10-tips-you-shouldnt-follow/#ixzz253ysFLBX