18:22 13 March 2013
Many of us have some sort of debt, whether we're using an overdraft, spending on a credit card or have just taken the biggest loan of our lives in the form of a mortgage.
But there are a number of misconceptions about all levels of debt, so to help you weed out the facts from the fiction, here we examine 10 of the most common...
1. "All debt is bad... "
Consumer group Which? has recently called for a crackdown on 'irresponsible lending', recommending such measures as more transparent information, more stringent affordability checks and earlier intervention if borrowers are struggling to pay.
This is on the back of the group's findings that an increasing number of consumers are relying on expensive debt (such as credit cards which come with average interest rates of 17.32%) just to meet essential expenses.
When used as a crutch like this, all debt of course, is bad. But, when used responsibly as a tool - a little bit of well managed debt can actually help you to build up a credit history and improve your credit score. And this can increase the chances of you being accepted for more competitive deals in the future.
And if you have no credit history at all, you may find it hard to get credit later on, such as a mortgage. You can access a copy of your report at our credit monitoring channel.
2. "Using an overdraft is expensive... "
Although many banks and building societies will charge you for the privilege of using even an agreed overdraft, if you shop around, you'll find that others allow you to dip into the red free of charge.
For example, the Nationwide FlexDirect current account offers a fee-free overdraft for 12 months. After this, you'll be charged a daily fee of 50p on arranged overdrafts of £10 or more. You can find out more in my article .
Alternatively, if you can cope with a small overdraft, First Direct's 1st Account offers a £250 fee-free overdraft, providing you pay £1,500 or more into the account each month or hold another financial product with the bank, such as a savings account. If you switch to the 1st Account you'll also currently receive £100 cashback.
3. "It's fine to just pay the minimum... "
While only meeting the minimum payment each month won't be a problem for your credit card provider, it can be a problem for you. Chipping away at your debt that slowly means it can take several years to clear it and you'll fork out far more in interest in the process.
Minimum monthly repayments on credit cards are set at ridiculously low levels - often as low as 2% of the debt amount. So if you can, try to pay off more than that each month - doing so could save you thousands of pounds in interest and help to be debt-free years earlier.
4. "I'm only responsible for half my joint debts... "
If you have a joint debt, such as a mortgage, with another person, you will both be liable for the full amount of debt. This means that if your partner fails to keep up with their repayments - which can happen after divorce or separation - your lender could chase you for the full amount, not just half of it.
Sharing a credit card account is slightly different though, as even if you and your partner both have a card, only one of you will be the account holder and will therefore be liable for the full amount of debt.
5. "Not paying my credit card bill can land me in jail... "
If you have defaulted on your credit card or personal loan, the creditor can't send you to prison. However, you may be issued with a County Court Judgment (CCJ) which states you must pay a certain amount towards your debt.
If you still can't make your repayments after this, you may have to sign up to an 'attachment of earnings', where you debt is collected from your employer out of your wage, or a 'charging order' where, when you sell your home, your creditor will take some of the proceeds.
But while you can't be sent to jail for not keeping up with your credit card repayments, you can be if you don't pay your council tax. However, this is only likely if you don't make your payments due to neglect or refusal, not simply because you're struggling financially.
6. "My bank can't help me with my debt problems... "
If you are finding it hard to keep up with your repayments, tell your creditor as soon as possible. Believe it or not, it may agree to freeze the interest on your repayments, reduce them temporarily, or even give you a break from them altogether. The sooner you talk to any creditor about your problems, the sooner it can help you to find a solution.
7. "Debt advice is too expensive... "
If your debt situation has spun out of control and you can't see away out of it, don't be afraid to seek professional advice - contrary to popular belief, it's free!
A number of debt advice charities, such as StepChange, Citizens Advice and National Debtline, will be able to help you find a way out of the dark - and won't charge you for the privilege. Whatever you do, don't turn to companies that ask you to pay a fee.
8. "If I don't keep up with my mortgage repayments, I'll lose my home... "
While it's true that this could eventually be the case, mortgage lenders have a code of conduct they must follow which means they must consider your case and treat you fairly.
Repossession is a last resort for mortgage lenders (it's actually an expensive process) and falling behind with some mortgage payments does not automatically mean you will lose your home.
However, you will need to make sure you are in contact with your mortgage lender to come up with an agreement that will suit both parties. Never, ever put your head in the sand.
9. "Bailiffs can break into my home... "
It's a bailiff's job to recover the money you owe through cash or possessions, but most don't actually have the authority to force their way into your home. However, they can come into your home without your permission if they find a 'peaceful' way in such as through an open door or window.
The only time bailiffs can physically break into your home is if they are collecting unpaid criminal fines, Income Tax or VAT, but only as a last resort. And if they have gained peaceful entry before, they can force their way back in if you try to stop them from entering.
New regulations coming into effect next year will also ban bailiffs from being able to call round late at night and will restrict what they can take from your home. Bailiffs will not be permitted to come into your home if only children are present and they will no longer have free rein to set their own fees.
10. "Once bankrupt, always bankrupt... "
Should you decide to file for bankruptcy, it will generally last for one year, during which time you'll be known as an undischarged bankrupt.
The bankruptcy will then be noted on your credit file for six years. Your ability to access credit will be affected during that time - and, in some cases, beyond - but it's still not the case that once you are bankrupt, it will stay that way forever.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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