There is a lot of financial misinformation out there.
In my online weekly newsletter at www.washingtonpost.com, I’ve been debunking money myths sent in by readers. Here are some of the questionable financial facts that confuse people:
Money myth: Co-signing is not a big deal. If I co-sign, I’m just a backup.
Financial fact: If you believe this, you shouldn’t be allowed near a loan document. When you co-sign for a loan (or credit card), you are agreeing to pay that debt in full if the primary borrower defaults or misses even one payment.
Myth: You can’t get credit after you file for bankruptcy.
Fact: Not only can you get credit, you might actually get more credit offers after declaring you can’t pay your debts. So why are lenders willing to give folks a credit card when they know they have filed for bankruptcy? Once you file for bankruptcy, you can’t do it again for many years. In the past it was six years. However, under the recently passed bankruptcy law, debtors who file for Chapter 7 bankruptcy court protection will not be able to get any future debts dismissed for eight years.
Myth: You can’t take a tax deduction for home equity loan interest if the money is not used for home improvement.
Fact: A lot of people pull equity out of their home to pay off debt or to buy a car. The theory is that since home equity rates are so low, you can use the money for whatever you want and a tax deduction. I always caution people about putting their home in jeopardy to pay off credit card debt, or even to buy a car. However, the fact is that as long as the loan is secured by the residence and you are not over the home equity limit, you can deduct that interest no matter what the proceeds were used for, according to a spokesman for the IRS. (In this case, the interest is deductible if the loan is $100,000 or less, or $50,000 if you’re married and filing separately.)
Myth: Student loans are dischargeable through bankruptcy.
Fact: Student loan debt (either private or government-backed) for the most part is not dischargeable in bankruptcy. There is a provision that allows student loan debt to be wiped out, but only in hardship cases. However, don’t let that be a glimmer of hope. A hardship discharge is a near impossible standard to meet. You have to prove you can’t maintain a minimum standard of living for yourself or any dependent if forced to pay the debt, and that you can’t pay the debt at the time of your bankruptcy filing or in the future.
Myth: Stephenie Steitzer of Cincinnati asks: “Is there such a thing as too much credit? I’ve heard that when credit card companies extend bigger lines of credit to you without you having requested it, it can actually hurt your score. Apparently, you become a risk of using up that credit and carrying way too much debt. Should I call my credit card companies and tell them to stop extending my limit without my permission?”
Fact: Having a lot of available (unused) credit is not taken into consideration in the scoring models produced by Fair Isaac Corp., which created the FICO credit score model used by many lenders. Available credit by itself is not considered by the FICO score because it is not nearly as predictive of future repayment risk as how you have managed your actual debt. If you don’t pay your bills, or if you use more than 50 percent of your available balance, this can cause a drop in your credit score. So don’t worry about your credit limit being raised unless you know you don’t have much self-control and will likely max out your card.
Washington Post Writers Group
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