Six bogus beliefs about credit and debt

When it comes to your finances, the only thing more dangerous than a lack of information is a wealth of misinformation. Because of the complex nature of financial laws, responsible consumers with good intentions can find themselves unintentionally making costly mistakes.

In an effort to help you avoid making decisions that could be hazardous to your financial health, we address six of the most common misbeliefs as they relate to credit and debt:

  1. There is an easy way to fix bad credit. No person or company can legally remove accurate items from your report for a fee. The Fair Credit Reporting Act (FCRA) states that delinquent account information can remain on a consumer's credit bureau file for a seven-year timeframe that starts 180 days after the account becomes delinquent.
  2. Bankruptcy discharges all debts. Debts not dischargeable in bankruptcy will generally include back taxes less than three years old, student loans, alimony, child support and debts incurred through fraud. To avoid foreclosure or repossession, you must ask the bankruptcy courts permission to "reaffirm" your mortgage loan and lease agreement and continue to make your home and auto lease payments. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 require a bankruptcy counseling certificate as a prerequisite for filing.
  3. A collector can’t call others about your debts. It may be hard to swallow; however, according to the Fair Debt Collection Practices Act (FDCPA), your collector is permitted to contact other people. They are only supposed to do this to find out where you live, what your phone number is, and where you work. Fortunately, the collector may not divulge the reason for the call to anyone other than you or your attorney. Also, if you don’t tell them otherwise, they can call you at work.
  4. A divorce decree matters to your creditors. Your divorce decree is an agreement between you and your spouse (not your creditors) on how your debts and assets will be divided. Since your creditors were not involved in the settlement and had no input on the results, the contracts you signed with your creditors have not changed and cannot be changed by the divorce decree. Whoever signed the original contract with the creditor will still be obligated to pay the debt after the divorce. That means you are still obligated on these debts and the creditors can report the derogatory status of these accounts on your credit bureau file.
  5. Your creditors cannot change your interest rate. According to the CARD Act of 2009, credit card issuers can make key contract changes to the account terms and agreement, including rate increases, with 45 days' notice. You should also know that many creditors will now raise your interest rates if your credit score declines, even if you have paid their particular account on-time and as-agreed.
  6. If your car gets repossessed, that’s the end of your responsibility. After a vehicle is repossessed, the lender will most likely sell it at auction to the highest bidder and apply the proceeds of the sale to the balance owed on the car. If the sale price is not sufficient to pay the balance due, there will be a “deficiency balance” remaining. You would be legally obligated to pay this deficiency balance. If you do not pay this balance, the creditor can possibly sue you in an effort to try to collect.

Fortunately, making financial decisions doesn’t have to be confusing. Visit our financial education section to learn more smart money moves.

Tanisha (Warner) Smith is a former communications manager at MMI.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.