Clearing up common money misconceptions that could be costing you.
What you don’t know in finance CAN really hurt you – particularly when it comes to your budget and your wallet. Unfortunately, knowledge in personal finance is often left to trial and error, so you only learn lessons by making mistakes that can hurt your bottom line.
That’s why “financial literacy” is so important. Being financially literate means you understand key financial topics well enough to make smart choices with your money in most circumstances. It means you’re not caught off guard by the unexpected or by the effects of using a financial tool that you didn’t fully understand.
With that in mind, Consolidated Credit has created a selection of resources that help you gain financial knowledge on topics that people often get wrong when it comes to personal finance. In addition to the video above, we have a 20-question Financial Literacy Test that covers basic personal finance and money management topics you should know in order to maintain stability day to day.
Debunking five financial myths. Five misconceptions that could be costing you big.
Our number one myth is that making monthly minimum payments means you’re responsible and you’re dedicated to paying off your credit card debt. But the truth is minimum payments keep you in debt longer and the downside is the more paying you make, the more interest you’ll pay. For example on a $1,000 debt if you had a 15% interest rate you’d pay over $850 in interest.
You should be devoting as much money as possible to pay down your debts. Even an extra $10-$20 a month can help reduce your debt faster. It’s also a good idea to pay the monthly minimum plus whatever interest was charged to your account that month. But the best way is to pay off your balance in-full every month.
Our second myth is that you don’t need 20% when getting a mortgage. The truth is most traditional fixed-rate mortgages require 20% down and the downside is that if you have less than that you’ll be stuck paying private mortgage insurance and your payments will be more. For example, with 3% down on a $150,000 mortgage, your private mortgage insurance would be over $100 a month.
If you have less than 20% to put down, find out about down payment assistance options. You can always visit our housing section for more information. The best way is to save up that 20% down so you can qualify for the home you really want.
Our third myth is that budgeting is time-consuming and a hassle, but the truth is new technology and apps make budgeting very easy and the downside of not using a budget is that you’re flying blind without really knowing where your money is going. And the cost for not knowing where your money is going can be overdraft fees, bounced checks and more.
A better way to get into the budget habit is to check if your bank offers free money management software. The best way to budget is to find a third-party secure platform, like PowerWallet.com, where you can integrate all of your accounts together.
Myth number four: There’s nothing wrong with running up credit cards as long as you don’t go over the limit. The truth is the amount of credit used is a key factor in your credit score. Never use more than 20-30% of your limit, if possible. The downside is if you’re using 50% or more of your credit limit you’re probably decreasing your credit score. The costs to maxing out your credit can be many. One of the biggest is connected to your credit score, because the better your credit score is, the less you’ll pay in interest on just about everything.
So never charge your credit cards up to the maximum limit and only try to charge about 20% of your available balance, but the best way is to pay off your credit cards every month and never carry a balance.
And myth number five is that your credit report is an accurate picture of your credit history. The truth is credit reports have mistakes and errors, and that may decrease your score. The downside is that a low credit score makes it hard to qualify for the best terms and rates on loans and credit. The cost of many mistakes could take hundreds of points off your score.
You should review credit reports from the Big 3 – Equifax, TransUnion and Experian – once a year to make sure everything is accurate. The best way is to get your credit reports for free via annualcreditreport.com.
We hope we’ve debunked some common money myths for you. If you’ve already gotten into trouble because you didn’t have the knowledge you needed, we can help. Call Consolidated Credit today or complete our online application to request a free consultation with a certified credit counselor.
Financial education is a lifetime effort
The Financial Literacy Test is designed to help you identify gaps in your understanding so you know where to start building your knowledge. It’s important to note that financial education should be a lifetime endeavor. Ideally, you want to focus on one key topic or area of your outlook where you feel you lack knowledge or are weak in your ability to manage that part of your outlook successfully.
Once you fill in a knowledge gap, you should find another one and focus on building your understanding. So, for instance, if you’ve never reviewed your credit report, you can start with credit resources that help you understand what your report says and what it means for your credit score. Once you’ve cleaned up your credit, move on to another area, such as investing. The more you learn, the better you’ll be able to make the right choices to achieve your goals.
If you need a roadmap for this kind of gradual knowledge building, we also offer a 30-day Financial Literacy Check List. This gives you a different actionable task you can complete each day to get a better picture of your financial world. During the 30 days if you run into a topic that you don’t understand, you can use free resources like our financial education center to increase your understanding so you can keep moving forward.