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Personal finance can be a complicated topic. People don’t often openly discuss personal finance, so it’s hard to know if you’re holding onto some incorrect money beliefs. And yet, understanding financial matters is crucial. Personal finance knowledge empowers you to better manage your finances and understand your options. It also helps ensure other people can’t take advantage of your lack of information.
Luckily, if you don’t have a money expert in your life to discuss these matters with, you can find answers online. This is a great place to start. Keep reading to learn about these 10 common money myths.
1. Credit cards are too risky to use
This first myth is heavily debated in the personal finance community. You’ll find many people standing behind the statement that credit cards are too risky to use. In fact, famous American radio host and finance advisor Dave Ramsey tells his viewers they should cut credit cards out of their lives. But while Ramsey has helped thousands of people get out of debt and does excellent work, we disagree with him on this point.
Let’s set the record straight: Credit cards can be a good thing as long you’re careful with them and understand the factors that impact your score. When used responsibly, a credit card can improve your score, which will open the door to many other opportunities. A great credit score means you can get better interest rates and be approved for auto loans, mortgages, personal loans and much more.
Additionally, many credit cards offer benefits such as cash back, gift cards or travel points. If you use your credit card responsibly and never pay interest, these are free benefits you can take advantage of.
Of course, you can only reap these benefits if you pay your credit card in full and on time. Racking up debt, missing payments or making late payments will all lower your credit score.
Those who are anti-credit cards fail to touch on what happens when you don’t have a credit card. Unfortunately, if you don’t have one, you may not have a very detailed credit history. And if you have a thin credit history, you’ll have trouble getting approved for items most people need, such as a rental lease, a mortgage or an auto loan.
That’s why it’s recommended you get a credit card early on and start building your credit history. This will also help you establish responsible spending habits at an early age, which means as you get more credit later in life, you’ll know how to handle it without being tempted to spend beyond your means.
If you’re not sure you can be responsible with your credit card, start with a low credit card limit or a secured credit card. This allows you to start small without risking significant debt.
2. Bankruptcy wipes the slate clean
Bankruptcy may seem like a clean, fresh start, but in reality, it’s only one option. You should never have bankruptcy as your first solution. In fact, you should do everything in your power to avoid filing for bankruptcy.
Bankruptcy has hugely negative consequences on your credit history and immediate financial opportunities. Depending on what type of bankruptcy you file (Chapter 7 versus Chapter 13), it can stay on your credit report for seven to 10 years. This will make acquiring any type of financial services (loans, credit cards, rental leases, etc.) extremely difficult.
Additionally, you don’t actually get to escape all your debt. Many people assume bankruptcy will wipe all their debts away with one bankruptcy filing, but this isn’t the case. Bankruptcy is meant to help people in a dire financial situation come to terms with their debts.
The situation is evaluated on a case-by-case basis. Some people’s debt is restructured and they still need to continue with (reduced) payments. Some people will have their debts discharged, but certain debts can’t go away.
The following debts typically can’t be discharged:
- Child support and alimony
- Some specific types of unpaid taxes, like tax liens (but if the delinquent taxes are several years old, they might qualify for discharge)
- Debts that caused malicious, willful injury to a person or a person’s property
- Debts for personal injury or death caused by an individual operating a vehicle under the influence of drugs or alcohol
- Debts that are not mentioned in the bankruptcy filing
And while student loans can be discharged in a bankruptcy filing, it’s quite challenging to do so and requires that the borrower files an “adversary proceeding.”
Also, note that a bankruptcy filing usually results in the liquidation of your nonexempt assets, so you can lose your home, cars and other valuables, making starting over very challenging.
Clearly, a bankruptcy filing isn’t a no-strings-attached new start. You may end up damaging your credit history for years to come, losing your assets and still having to pay many of your debts.
Make sure you explore your options before turning to a bankruptcy filing. There are solutions out there, such as debt consolidation and debt counseling. Being in significant debt doesn’t mean you can’t get out of it—which we’ll elaborate on later in this article.
3. Investing is only for the wealthy
There is a popular misconception that only the wealthy can invest. This simply isn’t true. Anyone can invest—there are many ways to invest and many options to suit all budgets.
Most importantly, everyone should invest. It’s essential to start thinking about your retirement as soon as possible. Without adequate retirement savings, you could be forced to work late into your life.
Take advantage of compound interest and start investing in your 401(k) account as early as possible. If your employer offers contribution matching, make sure you max it out, as this is free money.
The market is one of the best long-term ways to grow your money. Sure, the stock market has many ups and downs throughout the years. But if you’re investing over the course of years or even decades, the stock market is a great way to see consistent returns. The average stock market return for the last century has been almost 10 percent per year.
If you start contributing $50 per month with an expected annual return of 10 percent, you’ll have around $114,000 in 30 years. And that number will only go up if you increase your contributions.
4. It’s impossible to get out of debt
If you have a significant amount of debt, it can feel like it’s impossible to make any progress. Getting out of debt is possible, though it will take time and effort. It won’t happen overnight, but with consistent hard work, you can see that debt disappear.
People feel they can’t get out of debt because they don’t know where to start. You should explore your options online and find a debt relief solution that works for you.
Some of the debt solutions available include:
- Reaching out to your creditor for help: Your creditor may forgive a portion of your debt or offer you a new debt payment plan with a more manageable payment schedule or interest rate.
- Debt consolidation: You could find a creditor to consolidate all your debts into one loan. This loan is usually at a lower interest rate than all your other debts, and payments are more manageable since you only make one payment per month.
- Credit card balance transfer: If you have credit card debt, you can consider transferring your balance to a new card. Companies often promote a balance transfer with a zero percent interest rate for a few months. You can use this zero percent interest period to make a real dent in your principal.
- Debt counseling: Visit a debt counselor who will walk you through all your options. They’ll evaluate your situation and present you with a clear plan for getting out of debt.
5. Buying a house is always better than renting
It’s pretty common for people to have a goal to eventually buy a home. This is a great milestone to look forward to, but it’s essential to only take the jump into homeownership when you’re financially ready.
Renting is often a better choice for people when they’re younger as it allows for more flexibility in life. When you rent, you have options such as:
- Easily moving to another region or city when you need lower rent
- Moving in with roommates when you need to lower your rent
- Accepting jobs or opportunities in other cities without being tied down by a house or a mortgage
Some experts even argue that your money will perform better in the stock market than an investment in property (although this can vary greatly depending on your local housing market).
Homeownership also comes with many additional costs that people often forget about. These include property taxes, utility bills, home repairs and home upkeep. Instead, it may be better to rent while you’re young and start saving for a significant down payment that will reduce your mortgage costs in the future.
6. Paying in cash is best
Paying in cash can be good at times, but it also means you don’t have all the protections that come with using a credit card. When you pay with a credit card, you leave an electronic trail of the record. So, if you pay for something up front, a vendor can’t claim they didn’t receive the payment. You also often receive additional benefits such as extended warranties, additional travel insurance and more.
Secondly, paying for everything in cash doesn’t help your credit score. Your credit score will increase as you continue to pay for things via credit and pay them off in full and on time. This consistent record of responsible money management will help you secure lower interest rates and approvals on other financial products in the future.
Lastly, paying for items in cash doesn’t make your money “work for you.” Whenever possible, you want to get more for your money. Paying by credit card often gets you cash back or points toward something you would have paid money for anyway.
You should consider opting for cash payments if you’re irresponsible with credit cards or you receive a discount on the item or service for paying in cash. Otherwise, it might not be best.
7. Budgeting isn’t necessary if you watch your finances
Budgeting can help anyone at any income level. Even if you check your finances, you may just be checking for signs of fraud, but you’re not taking in the full picture of where your money is going. For example, reviewing your budget and seeing your $5 coffee purchase three times a week may look perfectly normal. However, a budget will start to highlight that you’re spending $780 on to-go coffee annually, which may encourage you to change this habit.
Budgeting can also help you prepare for the future. You can use a budget to save up for future goals, such as a down payment or a car. Or, you can also use your budget to save up for an emergency fund.
Luckily, there are plenty of tools available today that make budgeting a lot easier. Financial apps like YNAB (You Need a Budget) and Mint sync up to all your bank accounts and work as an automated budgeting tool. You can put in your spending and saving targets and the app will do all the work for you. It will alert you when you’re overspending, track your progress toward goals and even make recommendations for improvements.
Budgeting doesn’t have to be hard. Once you set it up, a budget can help you gain control of your money and your financial situation.
8. You should cancel credit cards you aren’t using
It’s understandable why so many people believe that if they aren’t using a credit card, they should cancel it. Technically, that logic makes sense as an additional credit card may seem like an unnecessary temptation to get into more debt or another opportunity to lose a card and risk identity theft.
In reality, you should hold onto those credit cards. Closing credit cards usually decreases your credit score because it affects your credit utilization ratio and credit age. Both factors are significant contributors to your credit score.
First, let’s discuss the impact on your credit utilization ratio. Let’s say you have three credit cards: two with a $3,000 limit and one with a $10,000 limit. Typically, you spend $3,000 a month on all your credit card expenses, and you pay it off in full. That means that out of the $16,000 credit available to you, you utilize $3,000, which is around 18 percent.
Your credit utilization ratio should be under 30 percent to avoid a negative impact on your score, so your 18 percent is not causing any problems. Now, let’s say you choose to close that $10,000 card. Now, you’re spending $3,000 out of the $6,000 available to you in a month. You’ve increased your credit utilization from 18 percent to 50 percent, which is considered bad and will lower your credit score.
Additionally, credit age is another thing to consider. If you can keep your first credit card open (even if you don’t use it), it lengthens your credit age. This positively impacts your credit score because lenders have access to more years of data on you.
Ensure you consider both of these factors before deciding to close a credit card.
9. You can wait to save for retirement
When you’re young, retirement can feel like it’s so far away. Many people therefore put off saving for retirement, not realizing the impact it will have on their future.
As we’ve mentioned before, compounding interest is your friend. And, the earlier you start saving, the more of an impact compound interest can have.
Let’s look at someone who starts saving $50 a month at age 20 versus age 30. Assuming an annual 10 percent return from the stock market, the 20-year-old will have about $319,000 when they turn 60. In comparison, the 30-year old will have about $114,000 by the time they’re 60. Even though the 30-year-old only missed out on $6,000 worth of contributions over the 10-year gap, their earnings end up being more than $200,000 less than those of someone who started 10 years earlier.
Even if you can only afford to put aside $10 or $20 a month, it’s crucial to start as early as possible.
10. Credit repair services are a scam
If you have terrible credit, you might not know how to fix it. That’s why there are credit repair services available to help. Some people think credit repair services are a scam because they technically provide services you could do yourself, but this is far from the case.
First, a credit repair service company has the experience and knowledge you don’t have. For example, submitting a claim to dispute something on your credit report can be tricky. You only have one opportunity to get the claim reviewed (unless new information surfaces), so you want to make sure you have the best chance of it being approved. A credit repair company knows what the credit reporting agencies look for when considering a dispute.
Secondly, a credit repair company will take the time to scan and review all your credit reports for errors. You probably don’t have the time to do this thoroughly, so you turn to credit repair services that will go through this process for you.
That’s not to say credit repair scams don’t exist, because they do. It’s essential to educate yourself on what these scams look like so you can avoid them. Additionally, credit repair companies are held to federal regulations, so if you are scammed, you can report the company. Though there are illegitimate companies, there are also many legitimate companies—you just need to know what to look for. Reach out to Lexington Law to learn more about legal credit repair practices.
The main takeaway from digging into all of these myths is that you should always do your research and not let financial misinformation rule your life. As you educate yourself, you are empowered to control your finances and your future.
Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.
Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.
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