Don’t let myths about personal finance hold you back. Experts say many of these commonly touted ideas won’t hold up to scrutiny.
1. Buying coffee will leave you broke
Chase found itself in hot water last week after it posted a tweet telling consumers to stop wasting money on purchases like coffee and cabs. The bank later deleted the tweet. But backlash was swift, with people like presidential candidate and Democratic Senator Elizabeth Warren and New York Representative Alexandria Ocasio-Cortez pointing out that much of the country’s savings crisis stems from bigger factors that are out of consumers’ control, like stagnant wages and rising living expenses. (Chase did not respond to requests for comment from Grow.)
Yes, small changes can help your bottom line. But your daily latte or the occasional avocado toast isn’t the major roadblock to goals like retiring or owning a home. “If the coffee gets you to work faster, and lunch out means you’re back at it, less distracted, they are perhaps good value,” says Elle Kaplan, founder and CEO of the Lexion Capital wealth management firm. “The big things, like salary, are impactful—not the little denials.”
2. Checking your credit score makes it drop
This myth comes from the fact that there are two types of credit checks: so-called hard pulls and soft pulls. A hard pull is when a financial institution looks into your credit in the course of processing your application for a mortgage, credit card, or other loan. That does cause your credit score to drop.
But what about soft pulls?
“Soft pulls are when you look at your credit score through a third-party app, like Credit Karma,” says Michael Kern, founder of the personal finance and small business consulting firm Talent Financial. “These types of credit checks have no impact on your score, and you are free to check as much as you like.”
3. Owning a home is always better than renting
Being a homeowner rather than a renter can have financial advantages, but not always. The best choice depends on a number of factors, including where you live. Scenarios exist in which you’re much better off renting, and it’s important to scrutinize your finances before you rush into homeownership.
“Taxes, homeowners’ association dues, and maintenance are all hidden costs that people tend to forget about when they have house fever,” says financial coach Christian Barnes of Do Better Financial. “All these costs can turn your dream home into a financial nightmare.”
Kaplan says it’s also untrue that homeownership is always the best way to build wealth.
“We are encouraged to purchase a home, and that is often poor advice, compared to building equity by investing in the stock market,” she says.
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4. Zero-interest credit cards will get me out of debt
Consumers with high credit card balances often choose to open a new account with a promotional 0% rate, transfer their debt to that card, and work to pay it down before the clock runs out. When the offer ends, and the APR skyrockets, the cardholder then opens a new account and transfers the remaining balance to that new card. And so on.
Financial coach Laura J. Lonie says that this practice relies on a strategy that won’t last forever.
“They will eventually be denied credit due to the number of new accounts they have opened, which lowered their credit score, or due to their debt-to-income ratios,” she says. “It’s only a matter of time before the house of cards collapses.”
Check out our guide for other strategies you can use to help you knock out your debt faster.
5. Canceling a credit card is good for your credit score
People who pay off a credit card are often tempted to cancel it. However, Nathan Grant, credit industry analyst at Credit Card Insider, says that keeping that account open has benefits. Having a longstanding account on your credit report can improve your credit score. So can having available credit you aren’t using.
“Having a card you don’t use will increase your overall credit limit,” he says. “If your balance is low or paid off, the difference between the balance and total limit, also known as credit utilization, helps improve your credit as well.”
It can also help to have a backup credit line available for emergencies, particularly if the card carries no fee.
“If a card’s not costing you money, leave it open,” Grant says.
May 9, 2019