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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.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Does Getting Joint Credit Cards Have an Impact on Both Spouses’ Credit?
While marriage can help you improve your financial situation, it does not automatically mean that you and your spouse will share a credit report. Your credit records will remain separate, and any joint accounts or joint loans that you open will appear on both of your reports. While this can be advantageous, it’s critical to remember that joint account activity can effect both of your credit scores positively or negatively, just as separate accounts do.
Users Who Are Authorized
An authorized user is a user who has been added to an existing credit account and has been granted the authority to make purchases. Authorized users are typically issued a card bearing their name, and any purchases made by them will appear on your statement. The primary distinction between an authorized user and a shared account owner is that the account’s original owner is solely responsible for debt repayment. Authorized users, on the other hand, can always opt-out of their authorized status, although the principal joint account owner cannot.
If your credit score is better than your spouse’s as an authorized user, he or she may benefit from a credit score raise upon account addition. This is contingent upon your creditor notifying the credit bureaus of permitted user activity. If your lender does report authorized users, the activity on your account may have an effect on both you and your spouse. However, some lenders report only positive authorized user information, which means that late payment or poor usage may not have a negative effect on someone else’s credit. Consult your lender to determine how authorized users on your account are treated.
Joint Credit Cards Have an Impact on Your Credit Score
Opening a joint credit account or obtaining joint financing binds both of you legally to the debt’s repayment. This is critical to remember if you divorce or separate and your spouse refuses to make payments, even if previously agreed upon. It makes no difference who is “responsible,” the shared duty will result in both partners’ credit histories being badly impacted by late payments. Regardless of changes in relationship status or divorce order, the creditor considers both parties to be liable for the debt until the account is paid in full.
Whether you’re happily married or divorced, you and your spouse may decide to open separate credit accounts. Most creditors will enable you to transfer an account that was previously joint to one of your names if both of you agree. However, if there is a debt on the account, your lender may refuse to remove your spouse’s name unless you can qualify for the same credit on your own. Depending on your financial status, qualifying for financing and credit on a single income may be tough.
While creating the majority of your accounts jointly with your spouse may make it easier to obtain financing (two salaries are preferable to one), reestablishing credit independently following a divorce or separation is not always straightforward. To make matters worse, your spouse may wind up causing significant damage to your credit rating following the separation, either intentionally or through irresponsibility – making the financial situation much more difficult.
Before you rush in and open accounts with your spouse, take some time to discuss the shared responsibility of these accounts and what you and your husband would do in the event of a worst-case situation. These types of financial discussions can be difficult, especially when you rely on items lasting a long time, but a mutual understanding and respect for each other’s credit can go a long way toward keeping your score when sharing an account.
Should you pay down debt or save for retirement?
While establishing a comprehensive, workable budget is undeniably one of the most important factors in maintaining a healthy financial life, it can also be one of the most difficult. For those who are struggling with personal debt, building a budget can be particularly challenging. When the money coming in has to stretch like a contortionist to cover expenses, it can be hard to determine where to focus — and where to trim.
Sometimes, the battle of the budget can come down to a choice between dealing with the present — and thinking about the future. When your income is running out of stretch, do you pay off your existing debt, or do you start saving for retirement? At the end of the day, the solution to that particular dilemma depends on the type of debt you have and how far you are from retiring.
If you have high-interest debt, pay it down
When considering how to allocate your budget, it’s important to understand the different kinds of debt you may have. Consumer debt can be categorized into two basic types: low-interest debt and high-interest debt, each with its own impact on your credit (and your budget).
In general, low-interest debt consists of long-term or secured loans that carry a single-digit interest rate, such as a mortgage or auto loan. Though no debt is the only real form of good debt, low-interest debt can be useful to carry. For instance, purchasing a home with a low-interest mortgage can actually save you money on housing costs if you do your homework and buy a house well within your price range.
High-interest debt, on the other hand, typically has a hefty double-digit interest rate and shorter loan terms, such as that of a credit card or payday loan. High-interest debt is the most expensive kind of debt to carry from month to month and should always be priority number one when building a budget.
To illustrate why you should focus on high-interest debt above everything else, consider a credit card carrying the average 19% APR and a $10,000 balance. If the balance goes unpaid, that high-interest credit card debt will cost $1,900 a year in interest payments alone. Now, compare that to the stock market’s average annual return of 7%, and it becomes clear that you’ll see significantly more bang for your buck by putting any extra funds into your high-interest debt instead of an investment account.
If you are having trouble paying off your high-interest debt, there may be some steps you can take to make it more manageable. For example, transferring your credit card balances from high-interest cards to ones offering an introductory 0% APR can eliminate interest payments for 12 months or more. While many of the best balance transfer cards won’t charge you an annual fee, they may charge a balance transfer fee, so do your research. You’ll also want to make sure you have a plan to pay off the new card before your introductory period ends.
Most balance transfer offers will require you to have at least fair credit, so if your credit score needs some work, you may not qualify. In this case, refinancing your high-interest debt with a personal loan that has a lower interest rate may be your best bet. Make sure to compare all of the top bad credit loans to find the best interest rate and loan terms.
If you’re nearing retirement, start to save
The closer you get to retirement age, the more important it becomes to ensure you have adequate retirement savings — and the more pressure you may feel to invest every spare penny into your retirement fund. No matter your age, however, paying off your high-interest debt should always remain the priority, as it will always provide the best rate of return (as well as likely provide a credit score boost).
Indeed, no matter how tempting it becomes, you should avoid reallocating money you’ve dedicated to paying off high-interest debt to save for retirement. Instead, the focus should be on re-evaluating your budget to find any additional savings you can. To be successful, you will need to make a strong distinction between want and need — and, perhaps, make some tough lifestyle choices.
Though simply eliminating your daily coffee drink won’t magically provide a solid retirement fund, saving a few bucks by homebrewing while also eliminating a pricey cable bill in favor of an inexpensive streaming service — or, better yet, free library rentals — can add up to big savings over the course of the year. The ideal strategy will involve overhauling every aspect of your lifestyle, combining both large and small cuts to develop a lean budget structured around your long-term goals.
Of course, while you should never allocate debt money to your retirement savings, the reverse is also true. It is almost always a horrible idea to remove money from your retirement account before you hit retirement age — for any reason. Withdrawing early means you will be stuck paying hefty fees for withdrawing money early and, depending on the type of account, you may also have to pay significant taxes.
Aim for both goals by improving income
As you take the necessary steps to pay off debt and save for retirement, you may have already stretched the budget so thin it’s practically transparent. In this case, it is time to consider ways to improve your overall income. Increasing the amount you have coming in not only provides extra savings to put toward your retirement, but may also speed up your journey to becoming debt-free.
The easiest solution may be to look for ways to increase your income through your current job; think about taking on additional shifts or overtime hours to earn some extra cash. Depending on your position — and the time you’ve been with the company — consider asking for a pay raise or promotion, as well.
If you do not have options to make more money at your day job, it may be time to find a second job. Look for opportunities that provide flexible schedules that will accommodate your regular job; many work-from-home positions, for example, can easily fit into most work schedules. Doing neighborhood odd jobs, such as babysitting and dog walking, may also provide a solid income boost without interfering with your existing job.
For some, the need to pay off debt and improve retirement savings can be more than just a source of stress — but a hidden opportunity to begin a new career adventure. Instead of being weighed down by yet more work, use the desire to better your budget as a reason to explore the profit potential of a passion or hobby. Starting a small online store, part-time consulting service, or other small business can be a great way to improve your income and your overall happiness.
While it may sound intimidating, starting a side business can be as simple as putting together a professional looking website and doing a little marketing legwork to spread the word. And no, building a website isn’t as scary — or expensive — as it seems, either. A number of the top website builders now offer simple drag-and-drop interfaces perfect for putting together a professional-looking web page in minutes (without breaking the bank).
How does a loan default affect my credit?
Nobody takes out a loan expecting to default on it. Despite their best intentions, people sometimes find themselves struggling to pay off their loans. These types of struggles happen for many reasons, including job loss, significant debt, or a medical or personal crisis.
Making late payments or having a loan fall into default can add pressure to other personal struggles. Before finding yourself in a desperate situation, understanding how a loan default can impact your credit is necessary to avoid negative consequences.
30 days late
Missing one payment can further lower your credit score. If you can pay the past due amount plus applicable late fees, you may be able to mitigate the damage to your credit, if you make all other payments as expected.
The trouble starts when you (1) miss a payment, (2) do not pay it at all, and (3) continue to miss subsequent payments. If those actions happen, the loan falls into default.
More than 30 days late
Payments that are more than 30 days past due can trigger increasingly serious consequences:
- The loan default may appear on your credit reports. It will likely lower your credit score, which most creditors and lenders use to review credit applications.
- You may receive phone calls and letters from creditors demanding payment.
- If you still do not pay, the account could be sent to collections. The debt collector seeks payment from you, sometimes using aggressive measures.
Then, the collection account can remain on your credit report for up to seven years. This action can damage your creditworthiness for future loan or credit card applications. Also, it may be a deciding factor when obtaining basic necessities, such as utilities or a mobile phone.
Other ways a default can hurt you
Hurting your credit score is reason enough to avoid a loan default. Some of the other actions creditors can take to collect payment or claim collateral are also quite serious:
- If you default on a car loan, the creditor can repossess your car.
- If you default on a mortgage, you could be forced to foreclose on your home.
- In some cases, you could be sued for payment and have a court judgment entered against you.
- You could face bankruptcy.
Any of these additional consequences can plague your credit score for years and hinder your efforts to secure your financial future.
How to avoid a loan default
Your options to avoid a loan default depend upon the type of loan you have and the nature of your personal circumstances. For example:
- For student loans, research deferment or forbearance options. Both options permit you to temporarily stop making payments or pay a lesser amount per month.
- For a mortgage, ask the lender if a loan modification is available. Changing the loan from an adjustable rate to a fixed rate, or extend the life of the loan so your monthly payments are smaller.
Generally, you can avoid a loan default by exercising common sense: buy only what you need and can afford, keep a steady job that earns enough income to cover your expenses, and keep the rest of your debts low.
Clean up your credit
The hard reality is that defaulting on a loan is unpleasant. It can negatively affect your credit profile for years. Through patience and perseverance, you can repair the damage to your credit and improve your standing over time.
Consulting with a credit repair law firm can help you address these issues and get your credit back on track. At Lexington Law, we offer a free credit report summary and consultation. Call us today at 1-855-255-0139.
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