‘Debit cards can build credit,’ plus other bad advice this debt expert wants you to ignore

Not all advice is good advice. And when it comes to advice on how to better manage your finances, there are those common misconceptions floating around that experts would like to discredit.

CNBC Select asked Leslie Tayne, a debt counseling attorney and founder of Tayne Law Group, about some of the bad advice her clients have told her they’ve been getting, and she had a lot to say.

Below, Tayne shares some of the worst financial advice she’s heard given to her clients and debunks these myths so you can make better decisions when it comes to your money.

1. Bad Advice: You must refinance your home to pay off credit card debt

The last thing you want to do when you’re struggling to pay off your credit card is put yourself at risk of losing your home too.

Borrowers usually refinance their home if they have interest on them mortgage, thus lowering their monthly payments.

But when you refinance your home to free up money to pay for payments on your credit card debt, you convert unsecured debt (credit card debt) to secured debt (mortgage), Tayne says.

“Refinancing your home to pay off credit card debt can be a bad idea because secured debt means that if you don’t pay off the debt, the lender has collateral they can use to pay off the debt,” she says.

In other words, if you prioritize paying off your credit cards and end up defaulting on your mortgage, you could lose your house.

Not to mention, there are closing costs and fees associated with a refinance, and you could end up paying more for the debt than you needed to.

2. Bad Advice: Use Balance Transfers to “Pay Off” Credit Card Debt

A credit card balance transfer can let you take advantage of zero interest while paying off your debt, but there are a few caveats to consider before applying for one.

First, your creditworthiness Affairs. Most bank transfer cards, such as the Citi® Double Cash Card, the Citi Simplicity® card and the US bank Visa® Platinum card, require good or excellent credit to be eligible. The Aspire Platinum Mastercard® is one that allows people with reasonable credit to apply, but the 0% introductory APR period is much shorter than that for better qualified candidates (only six months, compared to over a year with other cards).

Even if you’re approved for a balance transfer card with less than great credit, your credit limit on that new map will be significantly low.

If you have a lower line of credit on your balance transfer card, there is a limit to how much you can transfer to the new card. And you could end up with a high credit utilization ratio on the new card because you are using up much of your available credit. A highlight balance on a card, in combination with a low credit limit, means a generally higher occupancy rate and that can lead to you having a lower credit score.

But Tayne also emphasizes that you want to revise your budget before considering a balance transfer. “If you don’t have the resources in your budget to pay off the debt over the 0% period, you’re just shifting the debt and ultimately making the problem worse by delaying it,” says Tayne.

Do your research before requesting a balance transfer card to make sure it’s worth it. A difficult research appears on your credit report every time you apply for a new credit card (which temporarily stores your credit) and some balance transfer cards have high APRs after the intro period ends. Additionally, many cards also charge a balance transfer fee, so research what works best for you and those with whom no costs

3. Bad Advice: Borrow from your 401 (k) to pay off debt

Withdraw from your 401 (k) early is almost never a good idea, even if it seems like your only choice when you’re in financial trouble.

Withdrawing money – with or without a penalty – will only further lower your retirement savings goal.

“If you borrow from your retirement plan to pay off debt, you will miss out on income, potentially delay your retirement plans, and make it more challenging to build the fund, depending on your age and cash flow needs,” says Tayne.

Even in the case of the recent stimulus package, which relieves Americans of the fine upon withdrawal of their 401 (k), there are still taxes that will be applied when you repay the loan. “You use taxed income for this, which means you are paying back more than you borrowed because of taxes,” says Tayne.

Bad Advice: “To have good credit, you just have to pay a minimum every month”

During the making consistent and timely payments on your credit card accounts each month is a surefire way to build up good credit, it’s best to pay off your balance in full if you can.

If you don’t pay your balance in full every month, you will be stuck with high APR fees. And those costs are increasing every month thanks to compound interest.

View the table below to see how compound interest works with the interest rates on your credit card. Using timelines of 5, 10, and 15 years, you can see the effect of an interest rate of 16.61% (the average APR on your credit card The latest data from the Federal Reserve) on a credit card balance of $ 6,194 (Americans’ average credit card debtAssuming you only make the minimum payment, compound interest alone gets quite expensive over time – so much so that it exceeds your starting balance after 10 years.

Total credit card balance Interest accrued
Principal $ 6,194 $ 0
After 5 years $ 9,158 $ 2,964
After 10 years $ 15,698 $ 6,540
After 15 years $ 26,355 $ 10,657

Since paying just the minimum of your credit card can put you in debt much further – and increase your usage over time – Tayne advises cardholders to create a budget that will allow them to pay off their balance each month and can adhere to it. To consider 0% APR credit cards, like the Wells Fargo Platinum Card and the Amex EveryDay® credit card, to avoid paying interest on new purchases when you have a balance with you for a specified period.

“Having good credit is more than making payments on time and making minimal payments,” she says. “Many additional factors go into the scoring models.”

5. Bad Advice: “Once you’ve damaged your credit score, it can’t be rebuilt”

6. Bad advice: “Debit cards can build credit”

Debit and credit cards are two completely different things. If you use a debit card, the money will be taken directly from your checking account. Debit card (and other prepaid card) activity will not be reported to the credit bureaus, it will never end up on your credit report, and it will not directly affect your credit score.

If you want to build credit, a debit card doesn’t help and in fact with debit only can harm you. Tayne recommends those new to start applying for one credit secured credit cardSecure cards, such as the Capital One® secured and the Citi® Secure Mastercard®, are for beginners because they don’t need good credit to qualify. Many require an upfront security deposit that acts as your credit limit, but you can graduate to one unsecured card as soon as you demonstrate that you can handle the monthly bill payments on time and in full.

Do not miss: I opened my first credit card 5 years ago – here are the top 5 rules I adhere to to manage my finances responsibly

Information about the Citi Simplicity® Card, US Bank Visa® Platinum Card, Aspire Platinum Mastercard®, Wells Fargo Platinum Card, Amex EveryDay® Credit Card and Capital One® Secured has been independently collected by CNBC and has not been reviewed or provided by the issuer of the map prior to publication.

Editor’s note: The opinions, analyzes, reviews, or recommendations expressed in this article are those of the CNBC Select editorial board only and have not been reviewed, approved, or otherwise approved by any third party.

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