Common Money Myths & Debt
Some Common Money Myths and Debt
Each of us has our own pre-conceived ideas as to how money plays a part in our daily lives. Because of those ideas, it’s no wonder money myths are so prevalent. What’s more, this hype perpetuates not only from friends and acquaintances, but financial professionals as well.
Some of these sayings remind me of the saying “old wives tales”, and indeed, they may be. This first one is a good example.
- Never payoff your credit card balance in full because it will affect your credit score in a negative way.
Wrong – Keeping an outstanding balance on a credit card will not improve your credit score.
There are some individuals who believe that simply paying the minimum payment the credit card issuer calls for will help their credit score. All they succeed in doing is wasting money on interest paid to the card issuer.[bctt tweet=”There are many financial myths regarding credit. Read on.” username=”HBSMoneyTips”]
What you need, to have a strong credit score, is a balance on the card when you receive the monthly statement (using the card for purchases). This shows the credit card issuer and the credit bureaus that you’re using your credit.
Keep the amount used to about 20% of the approved credit limit which demonstrates that you can use the credit card in a responsible manner.
As an example, if the approved limit on all of your credit cards is 12,000.00, then don’t purchase more than 2,400.00. Then when you receive the statement(s), pay them on time and in full. No interest. This helps your credit score.
- Debt is good.
How often have you heard someone quote this money myths? Many believe that there is good and bad debt. They say that if you incur debt to purchase a home or to obtain an education, it is good debt and credit cards are bad debt. There is some benefit on mortgage debt since the interest can be deducted on your tax return. Education loan interest can be deducted, but only to an annual limit of 2,500.00. Not much benefit here. Don’t get caught up in the idea of buying more house that you can afford believing that it’s good debt.
You also don’t need to attend the most prestigious college with the idea that student loans will allow you to get a degree. The day quickly arrives when those student loans must get repaid. I know some individuals that are still repaying student loans after 20 years or more.
- I have no need for a credit score
Wrong again. More money myths. You might be able to pay cash for normal every day purchases, but if you need a mortgage, or even want to rent an apartment, a good credit score is a necessity.
If you have no credit score, it’s because your credit report is blank. If this is the case, it could present a problem in obtaining a job, an apartment, or a mortgage. If you think of a credit score as being some form of insurance, it’s worth trying to get a strong one. You don’t have to use it, but in an emergency, it’s there for you.
- I have plenty of time to save for my retirement and can wait.
Nothing could be further from the truth. Even if you have 40 or 50 years until retirement age, no one can predict the future, and emergencies occur at the worst time. I have seen individuals that waited to save for retirement, and were forced out of their jobs at 65 or 70, and simply couldn’t afford to retire. They scramble to find part time jobs to supplement their income and have nothing but stress for the remainder of their lives.
The earlier you begin to save for retirement, the longer your investments have to grow. With the advantage of compound interest, small sums can increase 5 or 6 times.
A simple example may surprise you. Just investing the sum of 5,000.00 at a return of 6%, the original figure will grow to almost 52,000.00 over a 40 year period. This shows how important it is to begin saving for retirement as early as you possibly can. What this means is, you could possibly afford to retire much earlier in life instead of waiting until your 70’s.
- One of the last money myths is that using credit cards will lead you into debt
For some individuals, I have to say that this is possible. That’s why it’s so important to teach children about money early in their life. If you use a credit card wisely, and follow our tips in the first money myths paragraph, you will be able to build a strong credit score. Use credit cards in an irresponsible manner, and you could be in debt, big time.
Firstly, don’t spend money like a politician in government. They usually have no concept of budgeting, and figure they can print more money as they need it. The importance of creating a budget is critical. Use it to control your spending, and to reduce debt, plus save for retirement. In plain words, don’t spend more than you can afford.
As you budget, remember to use the 20% rule for credit card usage, and budget the funds to pay the balance in full every month.
By paying your credit card balance in full and on time each month, you will build a strong credit score, and won’t waste any money paying interest.
Before believing any of these and other financial myths, get the facts and know exactly what you should do. If any of you know of other financial or money myths, please let us know by commenting below. We value your input.