The intentions may be good, but if your friends and family are sharing finance-related advice it may be best to just nod politely and then move on. There are many misconceptions when it comes to personal finance. Here are a few common pieces of “advice” you should think twice about before following.
1. Get in on This Stock before It’s Too Late
Unless you’re getting a tip from someone that has made a career out of analyzing companies’ stock or has great knowledge about a particular industry, it’s best to pass on specific investment advice. In fact, if the person has inside knowledge about a company, that could be insider trading and you definitely want to ignore it (remember Martha Stewart).
2. Max Out Your Credit Card Every Month
“If you want to build credit, max out your credit card and pay it off in full.” Well, the second half of that statement is sound advice, but you shouldn’t max out your credit card if you can help it. MyFICO, the company whose credit score is used by the majority of lenders, says 30 percent of one’s credit score depends on how much money is owed. This is called your utilization rate, or how much of your available credit you use. For example, if you have a card with a $10,000 limit (or two cards with $5,000 each) and spend $1,000, you’ve spent one tenth of your available credit and have a utilization rate of 10 percent. Your utilization rate should be above zero but below 20 percent, meaning you spend some money, but don’t even come close to maxing out your accounts.
3. Leave a Balance on Your Card
You’ll occasionally hear someone say that you should leave a balance on your credit card so you look like a good customer to the credit card companies. It makes sense in a twisted way; if you have a balance on your card you’ll have to pay interest and the company makes money. But you should never do this intentionally! There’s no advantage to keeping a balance, so you’re making interest payments for nothing.
4. Cancel Your Credit Card
Unless your card has an annual fee, or you can’t help but spend on credit when it’s available to you, you should never cancel your credit cards. 15 percent of your credit score depends on the length of your credit history. By leaving the account open, you’re increasing the length of that history. You can even leave the card unused in a drawer and it’ll help increase your credit score.
5. Never Take on Debt
True, debt can have a snowball effect and overwhelm you if you’re not careful. But debt can also be a useful tool when used properly. Borrowing money to go to school, buy a car, or start a business can be an excellent investment.
6. You Should Take Out a Loan to Build Credit
While taking out a loan and making installment payments may help build credit, it’s not always necessary, and the interest payments will cost you. There are ways to build and rebuild your credit for free and many free resources are available to you if you need guidance. The Consumer Credit Counseling Service is a national non-profit that can assist you with a free credit-counseling session with certified counselors.
7. Renting is a Waste, You Should Buy
Buying a house can be a good idea, but that’s not a given. Sure, you might be able to “lock in” a mortgage rate while rents climb, but you’ll also have to pay for maintenance. If you’re considering moving for a job, or just because, within the next five years, it might even be a terrible idea. Remember, 2008 showed us that a house isn’t a certain investment.
8. Coupons are For the Poor
You’d think everyone likes to save money, but some people may tell you that only the poor need coupons. Get over the stigma if you have one because it’s simply not true. The Fiscal Times report on two studies highlights that 26 percent of coupon users are high-earning white women, and that households making over $100,000 are twice as likely to use coupons as households that make less than $35,000.