Plus: 4 key fiscal takeaways during April’s National Financial Literacy Month
Media Contact: Barbara Fornasiero; EAFocus Communications; barbara@eafocus.com; 248.260.8466
Wyandotte, Mich. — April 20, 2023 —The proverbial advice in William Shakespeare’s Hamlet—“Neither a borrower, nor a lender be”—is usually not a practical option for most people in the 21st century, according to Carma Peters, president and CEO of Michigan Legacy Credit Union, a not-for-profit financial cooperative serving members throughout Michigan via local branches as well as through online-virtual banking platforms. In her credit union role, Peters fields myriad questions from concerned borrowers wondering about the impact of accruing debt on long-term financial health.
“I know people like to think of debt in simple good versus bad terms and want easy answers, but debt in-and-of-itself is neither good or bad; it just depends on each individual’s circumstances,” Peters said. “And in some cases, it can be both.”
Peters breaks down some misconceptions about good debt versus bad debt and what is actually important to focus on using these common borrowing scenarios:
Mortgages: Usually a mortgage is considered good debt unless the loan is larger than one can afford or “under water” if the current real estate market has a homeowner holding a mortgage balance greater than the home is worth. But Peters notes that the debt ratio is not calculated on credit reports or in your credit score, so the most important thing to remember is that the mortgage payments are made on time, every time.
Car Loans: Peters reiterated the most important thing would be paying on time, as similarly, the debt ratio is not calculated on credit reports or in your credit score. Car loans can be a solid way to establish credit, get a job and become upwardly mobile, so in that way, a car loan can be good debt. But if the interest rate on your loan is higher than necessary or you’ve overextended on your purchase–the debt can quickly turn harmful.
Education Loans: Whether this debt is good or bad depends on factors such as the size of the loan, one’s ability to pay it back based on the career pursued, and the interest rate on the loan. Borrowers who are repaying U.S. Department of Education-backed student loans are currently receiving a forbearance (a pause in loan principal and interest payments) through sometime in 2023—a date yet to be determined in the Student Loan Debt Relief plan. However, she cautioned that many student loan borrowers don’t realize creditors are still going to count those future payments into their debt ratio—and especially if they’re completed with school, it will have an impact during the life of any new loan they’re applying for down the road.
Peters also noted one of the biggest mistakes students make is not keeping their address current with their lender; they graduate and move, so when the student goes into repayment of the student loan, payments are missed because information was sent to the wrong address. Always update your address for student loans because as a new borrower, it affects your interest rate on new autos, credit cards, homes, and more when that first payment is late.
Personal Loans: Peters said consumers sometimes associate personal loans with bad debt—thinking that they’re only being used to finance a wedding or vacation beyond one’s means, but in reality, that isn’t the case. Bad debt comes into play more if the loan has a high interest rate, or if it’s on revolving credit and your balance is greater than 50% of your limit—as this will significantly affect your credit score.
Credit Cards: With credit card interest rates hitting record highs, and the Consumer Financial Protection Bureau projecting outstanding credit card debt could soon hit $1 trillion, it’s not a surprise that consumers always connect this type of debt with bad debt. However, Peters points out that credit card debt can be good when you have high availability—accumulated a lot of available credit (but still have charged less than 50% of your credit limit)—and have had the account opened for many years. Your available credit is the highest factor in your credit score.
In honor of April being National Financial Literacy Month, Peters urges consumers to take up the challenge to review their finances and set a plan to improve them. She offers four key takeaways, by importance, to get on the path to financial stability:
- Never charge more than 50% of your credit limit as this comprises 35% of your credit score.
- Always pay on time; this comprises 30% of your credit score.
- If you are unable to pay, do not ignore it. Call your creditor as soon as possible to see what options they can give you—so you don’t receive a ‘30+ day late’ payment showing up on your credit report. Options such as skip a pay, modification, and refinancing may be available—but only if you are proactive.
- Think about using a cool down period before taking on any new loan, to really analyze whether you can afford the payment. Peters promises that whatever “deal” they are offering, it will probably still be available three to seven days later – just ask for it.
About Michigan Legacy Credit Union
Michigan Legacy Credit Union (MLCU) is a member-owned, not-for-profit financial cooperative serving members who live, work, worship, attend school, or own a business in the state of Michigan. Michigan Legacy Credit Union is committed to providing quality financial services at a competitive price, delivered professionally and efficiently while keeping member/owners and their needs first. For additional information on MLCU, visit: www.michiganlegacycu.org.
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