Money Myths You Might Still Believe

There are a lot of money myths out there, and some of them can be quite damaging to your long-term financial health. Let’s take a look at some of them.

Taking on Debt Is Good

I’ve written before about how people love to use debt as an excuse to build credit, but it really is just an excuse. You can build credit in lots of ways that don’t involve taking on debt. While it’s certainly true that having a credit card can help with your credit score, maxing it out will do more harm than good.

If you’re focused on building your credit score, use your card regularly and pay it off each month, and focus on keeping your credit utilization rate low, by not maxing out your card. (Ideally, you want to use about 25% of the credit card’s limit at any one time.)

Debt Is Always Bad

Yes, this one is a myth too. There is good debt and bad debt (although people do tend to misuse the term good debt, a lot). Debt can be good if it allows you to finance a money making asset such as a rental property or a business. Consumer debt is almost invariably bad unless of course, it’s completely interest-free. Even then it can work against you if not paid off within the interest-free period.

Pensions Are for Old People

A reasonable enough assumption, given that most of us are old by the time we access them. But we should be thinking about them from a much younger age. Many younger workers think it makes sense to live (and spend) while you’re young and up your pension payments as you get older. But the reverse can be more accurate.

It’s actually the contributions made in the early years of your career that make the biggest difference to your eventual retirement funds, as they’ll benefit most from compound interest. The payments you make in the last few years before retirement simply don’t have the same impact.

Your Partner’s Credit Score Can’t Impact Yours

People believe this is true because, even if you marry someone with a terrible credit score, your scores are not ‘merged’ as such. Your spouse’s credit history can’t change or erase your own credit history or automatically change your score.

However, there is a way your partner’s bad credit, and bad money habits can impact you. As soon as you apply for a joint account, credit card, mortgage, or another loan, you have effectively chosen to merge your finances, even if you keep them completely separate everywhere else.

According to Equifax, opening a joint account, or otherwise merging finances, can mean both partners’ information can appear on future credit reports, and if you apply for any kind of joint financing, the lender will check both your scores and the bad score will generally prevent you from getting the best deals.

There’s no legal obligation to apply for credit as a couple, even if you’re married. If one of you has a terrible credit score, you may well be better at keeping finances completely separate and applying for any financing you need under the name of the person with the great score, at least until the other score has improved.

Obviously, there may be many other factors to consider when it comes to your marriage (or relationship) and money. Just make decisions with the knowledge that if you keep your finances separate, no credit agency can take a partner’s credit into account or let it impact your credit rating.

You Have to Save a 20% Down Payment (at least) for a Mortgage

The myth of the 20% down payment comes from the private mortgage insurance (PMI) requirement that exists in the USA. PMI is a type of insurance that lenders tend to require you to take out if you have a down payment of less than 20%. It’s important to realize that PMI doesn’t protect you in any way. Its sole purpose is to protect the lender. You may well need to pay PMI if you have a down payment or less than 20%, but you can request to cancel it once you’ve paid off enough of your mortgage to have 20% equity in your home.

According to the National Association of Realtors, The average first-time buyer pays about 6% for their down payment, while repeat buyers put down an average of 13%, so there are plenty of homeowners buying with a lot less than the mythical ‘required’ 20% down payment. There are advantages to having a bigger payment of course. Apart from avoiding the dreaded PMI, you’ll likely access better deals from lenders the more money you have for a home payment.

The other way that this is a myth is the idea that you have to save that money. In some cases you do, but there are various loans that you can apply for, depending on your circumstances, that may help with a down payment. One of the most common is an FHA loan. This is a government-backed loan with lower financial and credit requirements than a conventional loan. It’s possible to buy a home with an FHA loan, with as little as 3.5% as a down payment.

Saving a Small Amount Each Month Isn’t Worth It

Again, this can depend on a few things, such as how old you are and what you do with your savings. It comes down to boring old compound interest again. If you’re young and you’re investing your money wisely, a small amount each month can really add up over time. If you’re older and putting your savings in a low or no interest account that isn’t keeping up with inflation, not so much.

It’s worth playing around with a compound interest calculator to see how much impact small amounts saved can have over time.

Karen Banes is a freelance writer specializing in entrepreneurship, parenting and lifestyle. She writes articles, website content, ebooks and the occasional award winning short story. Her work has appeared in a range of publications both online and off, including The Washington Post, Life Info Magazine, Transitions Abroad, Brave New Traveler, Natural Parenting Group, and Copia Magazine. Learn More About Karen