There is a lot of financial misinformation out there.
In my online weekly newsletter at washingtonpost.com, I've been debunking money myths sent in by readers. Here are some of the questionable financial facts that confuse people:
Money Myth: Co-signing a loan is not a big deal. If I co-sign, I'm just a backup.
Financial Fact: If you believe this, you shouldn't be allowed near a loan document. When you co-sign a loan (or credit card), you are agreeing to pay that debt in full if the primary borrower defaults or misses even one payment.
Money Myth: You can't get credit after you file for bankruptcy.
Financial Fact: Not only can you get credit, you may actually get more credit offers after declaring you can't pay your debts. So why are lenders willing to give folks a credit card when they know they have filed for bankruptcy? Because once you file for bankruptcy, you can't do it again for many years. In the past, it was six years. Now, under the recently passed bankruptcy law, debtors who file for Chapter 7 bankruptcy court protection will not be able to get any future debts dismissed for eight years.
Money Myth: You can't take a tax deduction for home equity loan interest if the money is not used for home improvement.
Financial Fact: A lot of people pull equity out of their home to pay off debt or to buy a car. The theory is that since home equity rates are so low, you can use the money for whatever you want and get a tax deduction. I always caution people about putting their home in jeopardy to pay off credit card debt or even to buy a car. However, the fact is that as long as the loan is secured by the residence and you are not over the home equity limit, you can deduct that interest no matter what the proceeds are used for, according to a spokesman for the Internal Revenue Service. (In this case the interest is deductible if the loan is $100,000 or less, or $50,000 if married filing separately.)
Money Myth: Student loans are dischargeable through bankruptcy.
Financial Fact: Student loan debt (either private or government-backed) for the most part is not dischargeable in bankruptcy. There is a provision that allows student loan debt to be wiped out but only in hardship cases. However, don't let that be a glimmer of hope. A hardship discharge is a near-impossible standard to meet. You have to prove you can't maintain a minimum standard of living for yourself or any dependent if forced to pay the debt and that you can't pay the debt at the time of your bankruptcy filing or in the future.
Money Myth: Stephenie Steitzer of Cincinnati asked: "Is there such a thing as too much credit? I've heard that when credit card companies extend bigger lines of credit to you without your having requested it, it can actually hurt your score. Apparently, you become a risk of using up that credit and carrying way too much debt. Should I call my credit card companies and tell them to stop extending my limit without my permission?"
Financial Fact: Having a lot of available (unused) credit is not taken into consideration in the scoring models produced by Fair Isaac Corp., which created the FICO credit score model used by many lenders. That's because it is not nearly as predictive of future repayment risk as how you have managed your actual debt. If you don't pay your bills, or if you use more than 50 percent of your available balance, that can cause a drop in your credit score. So don't worry about your credit limit being raised unless you know you don't have much self-control and will likely max out your card.
Money Myth: Lynn Smith from Downers Grove, Ill., asked: "I heard that if a credit card holder dies with a balance, the debt is wiped out [and] the estate does not have to pay. Is this true?
Financial Fact: Do your debts die with you? Sorry to say, but no. Many companies may choose to forgive the debt, but others may try to collect from a deceased person's estate. The trustee of an estate is required to contact creditors and pay debts before distributing any money or property to any heirs. Creditors can lay claim to any assets, even if you haven't named a trustee. Of course, for many people there isn't any money to satisfy debts, making the issue moot.
The good news is that you can't really inherit someone else's debt (unless you took on that obligation somehow -- by co-signing a loan, for example -- before the person died). So if one of your parents dies owing lots of money that the estate can't cover, the creditors won't be able to take it out of your pocket.
For more money tips, go to washingtonpost.com and search for "Money Myths." And if you're wondering whether something you've heard is a money myth, send me an e-mail at firstname.lastname@example.org. Be sure to put "Money Myth" in the subject line. Comments from experts on financial myths are also welcome (I know a lot of lenders have had to debunk a lot of myths).
* On the air: Join Michelle Singletary at 6:40 p.m. tomorrow on "Insight" with Yakenda McGahee on WHUR, 96.3 FM.
* By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.
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Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.