Whether you consult the Internet or family and friends for financial guidance, it turns out much “common sense” money advice is riddled with inaccuracies. Here’s a look at the top four common money myths — and why the logic is misguided.
Myth 1: Charging everything to earn credit card rewards costs nothing, as long as you pay the balance in full every month.
Putting all of your purchases on a rewards credit card may seem like a simple way to maximize your cash back and rewards earning potential on the surface, and for good reason: Provided you pay the balance in full before interest rate charges accrue, you’re essentially earning something for every expense. But, there’s a commonly misunderstood caveat to making this strategy work to your benefit: Timing is everything.
Because your utilization ratio (the amount of your credit card’s balance relative to the available credit line) is a factor that creditors use to determine your risk (and subsequently, the interest rates and loan terms for which you’ll qualify), experts at Experian recommend that credit card balances never exceed 30% of your available credit line. 1 (If your credit limit on a card is $1,500, for example, your balance shouldn’t exceed $450).
Though paying your balance in full by the statement due date every month will ensure you avoid additional interest rate charges, it’s reported to the credit bureaus at the statement close date (which is typically about three weeks before your payment is due).
If your balance is well above 30% of your credit line and is repeatedly reported to the credit bureaus as such, you may unintentionally impact your credit score. If your objective is to earn the most credit card rewards possible, pay your balances in full before the statement close date indicated on your credit card statement so your low utilization is reported to the credit bureaus.
Myth #2: Opening store credit cards for a discount won’t impact your credit if you never use the card.
Opening a store credit card to save a percentage on your purchases isn’t without potential credit-related consequences—even if you never use the card. When retailers process your “instant credit” application (known as a hard inquiry) it’s reflected on your credit file, and will stay there for two years, regardless of whether the account was approved, denied, or kept open and active.
Though the inquiry simply indicates that you have authorized a potential creditor or lender to access your credit file and typically won’t impact your credit score, according to experts at Experian, several hard inquiries made in a short time span can signal concern to creditors that you are higher risk. 2 As a result, your loan and credit card interest rates and credit scores may be impacted.
Myth #3: It’s better to own your home than rent.
Home ownership may feel like a better use for your cash when you’re writing sizable monthly rent checks and hearing that mortgage lending rates are historically low and housing demand high. But consider the all in realities of owning a home aside from the intangible value of having a place you can settle for the long term, if you wish.
Real estate is a highly illiquid investment which you may or may not be able to sell when or at the price you want, it’s impacted by inflation, and a good rule of thumb for new home-buyers trying to figure out the annual expense of maintaining a home is to allocate 1 1/2 to 4 percent of the purchase price for regular annual maintenance. 3 If renting means you can afford to consistently invest but owning a home will tie up most of your cash, the former may prove a better financial strategy in the long-term.
Myth #4: Pay down all of your debt before you save for retirement.
When you’ve got credit card debt and student loans, investing in a retirement that’s decades away may seem like a financial goal you can postpone. But because consistency and time are your greatest assets in building retirement savings, it’s important to pay at least the minimum amounts due on your debts, while simultaneously investing at least enough into your employer-sponsored retirement plan to take advantage of any “contribution match” your employer might offer. (It’s free money).
By leveraging compounding interest early in your professional life, you can actually invest less than you must to reach the same balance if you delay retirement contributions for a few years, until your debt is resolved.