It’s always wise to take financial advice from friends and family with a grain of salt. But sometimes, even people you might consider to be money experts can lead you astray.
A few months ago, a friend of mine reached out to me to double-check some advice his wife received from a mortgage loan officer. The officer said a good way to boost your credit score is to carry a balance on your credit card that’s 50% of the card’s credit limit.
Not only is the suggestion factually wrong, but following it can be dangerous to your financial health. But this isn’t the only money myth going around; others are equally alarming.
To help you avoid getting duped, we’ve put together a list of five money myths, explaining why they’re wrong and what you can do instead.
1. Carrying a balance on your credit card can boost your credit
Your payment history and the amount you owe are the two most influential factors that determine your credit score. But neither of the pieces of advice the loan officer gave my friend’s wife — carrying a balance is good for your credit, and you should target a 50% credit utilization — impacts these two factors in a good way.
The first piece is wrong because FICO and other credit scoring models consider only whether your payment was on time or not.
On the second piece, a 50% credit utilization ratio isn’t ideal because it can hurt your credit score. Many credit experts recommend keeping your utilization below 30% so that it doesn’t damage your credit score, but that’s not a hard-and-fast rule. Ultimately, the lower your utilization, the better it is.
If you do carry a balance with the hope of boosting your credit score, however, you’d be on the hook for interest charges. And if you’re carrying 50% on a card with a high credit limit, that interest could pose a threat to your financial well-being.
What you can do: The best policy for responsible credit card use is to pay off your balance on time and in full every month. Also, keep your credit utilization as low as possible.
2. You’re throwing money away by renting
Homeownership is a big part of the American dream, but according to Sahil Vakil, a certified financial planner and owner of Myra Wealth, the suggestion that you’re throwing money away by renting is relative. Depending on your financial situation and the housing market where you live, owning a home might be unrealistic.
“Yes, there is a huge investment piece to [homeownership],” said Vakil, “but there are also a lot of throwaway components that are a part of the homebuying process.”
For example, closing costs can run between 2% and 5% of the loan amount, and you might not recover that money if you sell the house a few years later. Add maintenance and repair costs, and you could end up spending more out of pocket than you get back from the appreciation in home value.
What you can do: “If we take real numbers and facts and we actually run the data,” said Vakil, “we might see different results on different properties.” Before you decide whether to rent or buy, use an online calculator to do the math. Using the calculator, here’s an example of the rent-versus-buy situation:
3. You don’t need life insurance if you have no dependents
While most people view life insurance as a way to provide income replacement for loved ones they leave behind, but that’s just one of its uses. According to a 2017 report by LIMRA, an insurance market research firm, the top reason people buy life insurance is to cover burial and other final expenses. Whether you have a family of six or you live on your own, someone has to pay those costs.
If you pass away with no insurance coverage, your parents or other family members could be forced to pay those expenses, whether they can afford them or not. Funeral costs alone can range between $7,000 and $10,000 on average, according to Parting.
Another reason for people without dependents to consider buying life insurance is to lock in low premiums. Life insurance rates are based largely on your age and health, so the younger and healthier you are, the cheaper will be the coverage.
I bought a large policy shortly after my wife and I married, long before we had our first child. We have two children now, but that original policy still is enough to cover my family’s needs. And with the health issues I’ve developed in the meantime, I’m paying much less in premiums than I would have if I had waited.
What you can do: Take the time to see if life insurance is right for you based on the reasons above. If you need just enough to cover funeral and other final costs, you can look into a small policy for a few bucks a month.
4. You need to have a lot of money to invest
Financial advisors typically recommend saving at least 10% to 15% of your income toward retirement. But only 27% of Americans do so, according to a 2018 survey by the National Foundation for Credit Counseling.
Some people might think that saving just a little here and there for the future isn’t worth it. But the longer you wait, the harder it will be to achieve your goal. And if you wait too long, you could end up working long after your friends quit their jobs to enjoy retirement.
“If you think of interest and how accumulative interest works,” said Vakil, “even if you start with small numbers, they can go a pretty long way.” The important thing, according to Vakil, is to develop the habit of saving.
What you can do: Sign up with a micro-investing app such as Acorns and Finhabits, which allows you to invest with just a few dollars at a time, or even less. Also, check out other top investment platforms to see if there are better options for your personal situation.
5. Checking your credit score hurts your credit
Every time you apply for a loan or credit card, the lender checks your credit with a hard inquiry. Depending on the circumstances, this inquiry can knock a few points off of your credit score. That same rule doesn’t apply, however, when you check your own credit score.
To be fair, it’s understandable why many people believe this myth. Until a few years ago, it was almost impossible to get free access to your FICO credit score, so consumers just didn’t have enough information on the subject.
Checking your own credit results in what’s called a soft credit inquiry. The same thing happens when a landlord checks your credit as part of a loan application, an employer checks your credit as part of a job application, or a lender checks your credit to send a preapproved offer. Unlike a hard inquiry, a soft inquiry doesn’t impact your credit score.
Not checking your credit score regularly can prevent you from catching errors or fraud in your accounts. Disputing errors and fraud can take months to resolve, and if the impact is bad enough, it could prevent you from borrowing the next time you need money.
What you can do: Sign up for a service like Discover Credit Scorecard to get free access to your FICO credit score. Check your credit score regularly to make sure it’s error-free and stays on track to where you want it to be.
Vet financial advice to avoid more myths
Some pieces of money advice are bad for everyone, but some are relative. “A lot of topics have a gray area; it’s not always black and white,” said Vakil. “Some situations it might be true for some people, but not for others.”
Before you put a money suggestion into practice, vet it. Ask around, do research online, and seek professional advice. But don’t just stop there. Even if you hear something from someone you trust, verify it with other sources. And don’t do something just because a friend or family member recommended it. The intent might be sincere, but that doesn’t mean it’s good advice.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.24% – 7.24%3||Undergrad & Graduate|
|2.47% – 6.97%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.69% – 7.21%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|