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06 Sep 2012

10 Credit & Debt Myths (Part 2)

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John Vaughan (Financial Advisor) @ Lucid Living

Myth 6: My finances are fine because I can pay my minimum payments each month.
By just paying the minimum payment on a debt, you extend your payments for many years, paying massive amounts of interest. You should always pay more than the minimum payment and if you find you can’t, then you are at risk of falling behind, a one or two percentage point rise in interest rates can push you over the edge. Living from pay cheque to pay cheque is not a sign of financial well-being.

Myth 7: It’s okay if I take a cash advance from my cards to keep me from falling…
Some people take cash advances on their credit cards to pay their other creditors on time. It is better to fall a little behind than to borrow your way deeper into debt. When you borrow to pay debt you just increase the amount you have to pay the next month because you will now have interest to take care of. Rather shave as much as possible off your budget or cancel some services you are using to pay the debt. A little sacrifice is better than dealing with debt spiralling out of control.

Myth 8: If I sign surety for a loan, the lender will never come after me.
If you sign surety for someone and they don’t pay you can bet your last rand that the creditors will look to you for the money. A surety is as binding as if you had signed for the loan yourself. Unless you are prepared to repay the loan when the borrower defaults, you should never sign a surety.

Myth 9: If I get debt counselling it will not affect my credit record.
While going for debt counselling will relieve your financial situation there are two important things you need to know. The first is that it does not mean that you will no longer have to pay your bills. In essence it gets the creditors to extend the period of your loans. This will result in reduced payments but higher interest fees in the long term. If you apply for debt counselling you will not be able to apply for more credit when you are under supervision and it will be recorded on your credit report. So in other words it will definitely be an obstacle to you getting credit in the future.

Myth 10: I can’t live without credit.
While very few people could pay for a home or a car with cash, it is possible to become debt free if you put your mind and resources to it. If you avoid acquiring debt for lifestyle purchases (holidays, flashy cars entertainment etc) and pay extra into your home and car you could be totally debt free by the age of 40. This gives you a good 20 to 30 years to build up a substantial nest egg and total financial security.

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