From Emily Rienhardt, blogger for Mid American's Money Matters finance blog
Many Americans are very used to their debt, often times with thousands of dollars owed to creditors. Between mortgages, student loans, and credit card debt, it’s become very common for people to be in debt. Sometimes the debt problems are bigger than just a couple of thousand dollars, and suddenly you start to wonder, how much do I really know about debt and credit?
There are so many common misunderstandings when it comes to debt, and we should dive into a couple of them and see what we know. It’s quite normal to have the personal finance waters get a little murky at times. We just have to take the time to better understand it.
If I’ve co-signed a loan for a friend and they’ve suddenly stopped paying, it’s their problem, right?
Only partially right, because it’s actually your problem now too. Co-signing a loan is essentially the same thing as taking out the loan yourself. You’re signing your name, saying you’ll be a responsible party as well. If the person you co-signed with stops paying, it could do real damage to your credit score, and creditors won’t care if the loan wasn’t exactly yours, or if your friend let you down. This will look like your problem, and creditors could potentially come after you for collections, fines and penalties.
It’s incredibly important to either NEVER co-sign a loan with another person, or to really know you trust that other person (like maybe with your life, or your CREDIT SCORE). My father had to co-sign on my car loan, and I’ve never taken a bill more seriously in my life. There’s a lot of pressure not to default in any way on that loan. Not only for my own credit score, but for his too. You need to make sure that the person you’re helping takes this responsibility as seriously as you do.
Debt affects my credit score, right?
Yes, it sure does. It’s smart to keep your debt low or nonexistent for your own bottom line, because holding on to high balances will have a negative impact on your score. For credit cards especially, your account balance should remain under 35 percent of your available credit limit. This is important for keeping a high credit score. Beyond the practice of not maxing out your credit cards, it’s essential for you to pay back your repayments on time and to be making payments above the minimum requirement.
If you aren’t paying careful attention to your credit card usage and the spending you’re doing, you could suddenly notice that you’ve gone overboard. If you ever catch yourself asking, “What did I buy? Why did I do that?” you’ve probably gone a little too far, and you might need to take a closer look at your habits. A lot of people will gradually start to overspend with their credit cards. Their limit starts out relatively low, and as time passes, the spending limit is increased and slowly, their spending habits could increase too. As the balance climbs, the interest compounds and the payment amount grows.
Is there any kind of debt that’s considered “good” debt?
Good debt is considered an investment that will grow in value or will generate long-term income. Student loans are often considered a good example of this – you’re taking out money to grow your education and in the end, hopefully will result in better jobs for you, and better income. The phrase gotta spend money to make money kinda fits right here. Real estate, small business ownership, student loans, and wise investments are some great examples of this.
A few years ago when I was just starting out as an adult on my own, I had no credit at all. I signed up for my first credit card, got my first $1,000 loan from my bank, and bought a car (with the help of a co-signer, as mentioned above). It was a lot of firsts and I handled all of them responsibly. They aren’t necessarily the best example of good debt, but I needed to take them on in order to start building a credit history for myself. Depending on your own circumstances, taking on small, new lines of credit can be a good thing for you and will help you grow your credit profile. Starting small, and taking it slow is a good way of doing this.
My spouse has terrible credit. Does their credit score affect my credit score?
You are not responsible for your spouse’s bad credit or their debt. Unless you’ve applied for a loan or a line of credit together. Even if your score is spotless, you could be turned down for credit you apply for as a couple, depending on the seriousness of their credit problems. Applying for loans together will mean that a creditor will take both of your financial histories and your income into consideration.
Finding out how and why your spouse got into the credit problems is a good exercise. It helps you determine how the two of you will handle the loan or line of credit together, from here on out. You are also free to consider keeping your loans and lines of credit totally separate. Some couples never merge their financial lives when they get married, and you definitely do not have to. Take time to work through the credit issues together, and don’t be afraid to find advice and assistance where you need it. Financial advisors can help the two of you create a plan for working through some of your credit issues as a couple.
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