5 of the Most Common Money Myths Busted
Since money means different things to different people, it’s no surprise myths are abundant.
Friends, parents, teachers, and even those you look to as financial professionals, can perpetuate these myths.
So let’s examine five of the most common money myths that you may still believe.
Myth #1: Carry a balance on your credit card to help your credit score
No, you absolutely do not need to carry a balance on your credit card in order to do anything to improve your credit score.
Many people think just paying the minimum due (or a little above) is the best way to keep a credit score healthy. In fact, they’re just wasting money in the form of interest paid to the lender.
In order to have a strong credit score, you need to utilize your lines of credit, meaning you need a balance when your credit card statement arrives.
Having a statement balance and carrying a balance are two completely separate things.
A statement balance just shows both the lender and the credit bureaus that you’re using your credit.
To demonstrate you can use it responsibility, you should aim to keep the amount of credit you use under 20% what’s available to you.
So, if you have three cards and a total of $15,000 in credit, don’t spend more than $3,000 on your cards in a given month.
Once that statement balance arrives, you should pay it off on time and in full.
Just paying the minimum or leaving a little bit on your card means you’re paying interest.
Paying off your balance on time and in full still gives you a strong credit score.
Myth #2: This debt is good
Ah, the old adage used to justify getting into debt. People believe there is a difference between “good” debt and “bad” debt.
Going into debt to buy a home or get an education is often seen as “good” debt while racking up charges on your credit card is viewed as “bad” debt.
To a degree, student loans and a mortgage are “good” debt. But there needs to be a cap on this mentality.
Don’t buy more house than you can actually afford thinking it’s “good” debt. Don’t go to the most expensive school you get into because student loans are worth getting your degree.
You should always aim to take on the bare minimum amount of debt – even when it comes to good debt.
Myth #3: I don’t need a credit score
Yes, it would be a wonderful world if we could all just pay cash for everything all the time. Unfortunately, that’s not realistic – especially when it comes to buying a home or financing an education.
But needing a loan aside, a credit score is also used by landlords to determine if you’re a good potential tenant and even some employers run a credit report check (though employers won’t see your score).
If you don’t have a credit score, it’s because there is nothing on your credit report.
The lack of a credit report and score could keep you from getting a job, an apartment, or an emergency loan.
Perhaps it’s best to think of a strong credit score as insurance. You don’t want to have to use it, but at least it’s there if you do.
Myth #4: I can wait to start saving for retirement
Too many people in their early 20s delay saving for retirement thinking, “hey, I’ve got time.”
Sure, you probably have 40 years until retirement. But the later you start saving, the less you’ll actually have to live off of and thus be forced to stay in the work force longer than you hoped.
Compound interest causes drastic changes to small sums of money when given the gift of time.
If you invest $5,000 tomorrow and it earns an average 6% interest for 30 years, you’ll have $28,717.26.
Give that same amount of money another decade and you’ll almost double your money! $5,000 at 6% for 40 years yields $51,428.59.
It’s important to start saving for retirement as soon as possible.
Compound interest can work its magic on your money so that maybe you’ll have the flexibility to leave the work force in your 60s (maybe even sooner) instead of working well into your 70s.
Myth #5: Credit cards lead to debt
When a credit card is used responsibly, it can lead to a strong credit score. But if you fail to adhere to two basic principles, it could land you in debt.
Don’t spend more than you can afford.
This is why it’s important to set a budget and regularly monitor your bank account to ensure you aren’t overspending.
You can also pay your credit cards off throughout the month, so your bank account accurately reflects what you’ve spent. Just remember to have at least one purchase on your credit card when your statement cycles so that you’ll show utilization.
Pay off your cards on time and in full.
If you pay your credit cards off on time and in full, it will keep you from ever paying a penny in interest.
Don’t just get your financial information from one source. Always fact check what you’ve heard, because it really could just be a popular money myth.
What’s one of your favorite money myths that you’ve heard? Share in the comments below.