Sasquatch and Dracula are popular myths that pose no threat in the real world. But when you hear myths about money, your personal finances and your credit are at stake — and there are a lot of common misconceptions in the ether. For Friday the 13th, let’s debunk some major money myths.
Myth 1. Bankruptcy is a clean slate.
The Truth: Bankruptcy is not a cure-all for debt problems. While it can help eliminate certain obligations, it cannot eliminate student loans, child support and alimony, income tax liability and more. Plus, bankruptcy appears on your credit report for seven to ten years, deflating your score and making it much harder to borrow in the future.
Myth 2. All debt is bad.
The Truth: Excessive debt should be avoided. It can lead to poor credit, bankruptcy (see above) and financial ruin. But borrowing is sometimes necessary. Most people need a loan to acquire a car or buy a home. Plus, financing, when used correctly, builds credit. If you live and borrow within your means, you can maintain good financial health.
Keep in mind, "good debt" is its own financial concept. The term refers to financing that offers a potential return on investment. The most notable example is a mortgage, where your payments build home equity.
Myth 3. Credit cards can only cause financial trouble.
The Truth: Credit cards are dangerous, if you use them to fund purchases you can't afford or readily repay. However, if used correctly (i.e. you pay your bills on time and avoid carrying a balance), they help you build a solid credit score and earn rewards on spending. They also offer greater liability protection than cash or debit cards.
“Having a solid credit history is important,” said Leah Hadley, a senior financial adviser at Great Lakes Investment Management. “Credit cards offer additional protection such as extended warranties and fraud protection.”
Myth 4. You must carry a credit card balance to improve your credit score.
The Truth: Yes, you need credit to build credit, which is why credit cards, as mentioned above, are not a payment method to automatically forego. However, you don't have to go into any debt (and pay interest) to build a better credit score. You can simply by make small purchases on a credit card and pay your balance off in full each month by your due date. Here are some more tried and true ways to build or fix your credit.
Myth 5. Only high earners can achieve good credit.
The Truth: Good credit isn’t a luxury that’s only available to the rich. It’s possible to be wealthy and have terrible credit. It’s also possible to have great credit on a limited income. Credit scoring models don't account for your salary. Instead, they reward good money management, like paying your bills on time, not racking up too much credit card debt and spacing out new credit applications. Again, if you live within your means, all these habits are possible.
Myth 6. You're too young to save for retirement.
The Truth: The outlook for Social Security and Medicare is grim, and you shouldn’t rely on these programs to bankroll your golden years. To retire comfortably, you will need enough savings to cover your regular expenses and guard against emergencies. Whether you’re 18 or 58, you should start saving, especially since there are ways to bank more for retirement in five minutes or less.
Myth 7. Your life insurance policy should cover 10-times your income.
The Truth: That's a very, very broad rule of thumb for young applicants with dependents. In actuality, everyone's life insurance needs vary, depending on their current debts, existing and future expenses (think college tuition), assets and the number of years their family needs support. You can easily find out how much coverage you need using our free life insurance calculator.
Myth 8. Your partner manages the money so you don't have to worry about your financial health.
The Truth: Ignore your finances at your own peril. There's no guarantee your spouse is good at budgeting. Moreover, if you ever break up, you won’t be prepared to manage your own money.
“I hear ‘my spouse handles the money so I don't need to worry about it.’ This is a tough lesson to learn when someone is going through a divorce,” said Hadley. “I often find myself working with individuals who left all of the money management up to their spouse. Going through a difficult and emotional life transition such as a divorce is not the time to be taking a crash course in money management.”
Myth 9. Millennials are bad with money.
The Truth: Contrary to what you see on television, millennials don’t blow all their money on iPhones, avocado toast and Tide Pods. Many studies and research groups have found the demographic is actually quite wary of debt and love to hunt for the best deals. It’s possible student debt and lower wages have led millennials to be more cautious than previous generations. (By the way, here are 50 things millennials get dragged for.)