Most of us have debts of some sort of the other. Whether it’s credit card debt, an overdraft or a mortgage, debts need to be kept an eye on. But there are a number of myths and half-truths around debt out there. Let’s have a look at the top 10.
1. It’s fine to pay just the minimum each month
If you only aim off for the minimum each month for your credit card repayments, you’ll end up paying your bank interest for years to come. Credit card companies set their minimum repayment amounts at ridiculously low levels on purpose – because they make big money out of people who only pay back the minimum amount. The longer you take to repay, the more it costs.
For example, if you borrowed £3,000 on a credit card charging 17.9% APR, and…
- Paid the minimum 2.38% back per month, it’d take you almost 27 years to pay it all back (and you’d have paid over £3,800 just in interest payments – more than you originally borrowed!)
- Paid 10% back per month, it’d take you four years and eight months to pay it back, and you’d pay £470 in interest.
- Paid 20% back per month, it’d take you two years and five months to pay it back, and you’d pay £219 in interest.
In short… as long as you don’t have other priority debts to pay off (for example your mortgage or electricity bill) pay more than the minimum credit card repayment if you possibly can.
2. Bailiffs can break into my home and take my property
This is only the case if they are collecting outstanding fines on a criminal case or have a warrant from a court (for example for non-payment of income tax).
However there is a clause – if they find their way in through an unlocked door or window, this counts as ‘peaceful entry’ (and they can then seize your goods). Make sure you know what your full rights are when it comes to bailiffs, so you don’t get caught out with any tricks.
3. Bankruptcy is free to declare and lasts for a lifetime
Bankruptcy costs! In England and Wales, it costs £700 to petition for bankruptcy. ( You pay £175 to the court and £525 to the Official Receiver).
Once you declare yourself bankrupt, you remain an ‘undischarged bankrupt’ for a year. You name is noted on the credit file for six years and you might find it very difficult to obtain credit.
4. If someone living with me has bad credit rating, my credit rating will be affected too
Your credit rating affects you as an individual and has nothing to do with who lives with you – unless a) you have a joint tenancy agreement or b) any other form of joint finances (such as a joint account or mortgage.
Your credit rating affects you as an individual and has nothing to do with who lives with you
In the case of tenancy agreements, you may be penalised if someone you live with misses a rent payment (though not all landlords are covered by credit agencies). If you live in shared accommodation and are worried about a flatmate affecting your credit score, you could ask for a separate tenancy agreement.
It’s important that credit rating agencies have your address up to date so you don’t get penalised for any missed bills at one of your previous properties. This is all the more reason to check your credit report for free right now and make sure your details are correct.
5. I can go to prison if I don’t pay my debt
Prison sentences for debtors were done away with in the 19th Century. It isn’t a criminal offence if you can’t pay your debts. A court, could in theory, send you to prison for non-payment of taxes or certain fines, but only where there was a wilful refusal to pay or culpable neglect – and even then, prison tends to be the last resort for repeat offenders rather than those struggling with debt.
6. I’m in debt but I can’t afford debt advice
Don’t be afraid to seek help if your debt situation has spiralled out of control. Debt advice charities like StepChange, Citizens Advice Bureau, National Debtline all have free services offering advice. See our article on getting out of debt to find out more.
7. Overdrafts are very expensive
First Direct’s 1st Account has a £250 free overdraft. The only catch is that you must pay in £1,000 each month into the account. You will also get £100 for simply switching to First Direct.
If you shop around you will find examples like Nationwide FlexDirect current account, which offer a non-fee overdraft facility for a year.
8. Lenders have an address blacklist circulating amongst them
This one is an urban legend that refuses to die out. Your address cannot be ‘blacklisted’ – there is no such thing as an address blacklist!
9. My credit file can be checked every time I apply for a job
Only in certain professions (namely accountancy, financial advice and some jobs in law).
10. My bank will never help me in repaying my debts
You’d be surprised. If you’re finding it hard to keep up with your repayments, talk to your lender as soon as possible. They might be able to rework the payment terms or even freeze repayment for some time. See our 10 step plan for getting out of debt for guidance on contacting your creditors for help.
Debts are natural common in our day to day lives. But if you don’t take them seriously and don’t keep up with the repayments, they can get the better of you. You will find a lot of resources on how best to manage your finances in our Money section. And as always, if you have any pressing doubts or just want to let us know if we have been any help, you can reach us on [email protected]
APR*(Annual/Annualised Percentage Rate): The annual rate that is charged for borrowing.