Have you heard the one about the lady who freezes a credit card to prevent her from spending (have you ever frozen yours)? There are a lot of myths out there about money that are believed by a good majority of consumers, so it’s important to recognize the myths when you see them, educate yourself, and change your habits to include true financial knowledge.
Money Myths to be Aware of…
- “I paid off my credit card (or I’m in the process of paying it off) so now I should cancel it.” – We’re often lead to believe that after paying off credit cards that the cards should be canceled. The truth here is that every credit card you cancel shortens your credit history. Please, pay off that credit card debt but do not cancel the card. Either learn how to use credit cards more responsibly (I know, easier said then done), or shred it and forget it even exists (that’s what I do).
- “If I buy in bulk it’s cheaper.” – Warehouse stores are a great place to buy a lot more for less for things like parties and events but if you go there religiously to stock up on a ton of stuff you don’t even need (or just because it seems like a good deal), you are totally wasting your money. Do you really need six jars of jelly? A 20 pound jar of pickles? 1 million Q-tips? Doubtful. Plus, where in the world are you going to store all that stuff?
- “If my card is declined then the clerk will cut up it up right there in front of everyone.”- This is one that I heard often when I was a kid. Maybe it was just an 80’s thing? It is very dramatic (to put it mildly) to think a cashier would take out the scissors for a declined card. While it looks good in movies, it just doesn’t happen. Technology can embarrass you though. Try using a credit or debit card without funds and the clerk will (most likely) announce publicly you don’t have enough cash to cover your purchases. “Honey, it’s been declined.” I heard a clerk say it to someone just the other day and everyone collectively cringed.
- “If I file for bankruptcy my slate is wiped clean and I’m left debt-free!”- Bankruptcy is not something to be taken lightly and it will stay on your credit report for 10 years from the date of filing. Also, a lot of debts ARE NOT discharged in bankruptcy. (You might also like these related posts on bankruptcy)
Debts that are not discharged in bankruptcy*:
- School loans
- Taxes and tax liens
- Alimony and child support (domestic support obligations)
- Debts obtained through fraud, false pretenses or false representation
- Debts you failed to schedule in time to allow creditors to file proofs of claim (unscheduled debts)
- Debts for fraud while you were acting in a fiduciary capacity, or for embezzlement or larceny
- Debts for willful and malicious injury
- Debts for fines or penalties to governmental units
- Debts for judgments in wrongful death or personal injury lawsuits resulting from motor vehicle, vessel or aircraft accidents while you were intoxicated
- Condominium or cooperative association fees or assessments (that means HOA fees!)
- “I’m really good with my finances so I don’t need to check my credit report.” – Even if you’re great with your finances (yay!) don’t assume that everything has been reported correctly. Check your credit once a year (not more than that) to make sure you haven’t been the victim of misreporting or identity theft. For the accounts you know about it’s easy to see if wacky purchases start appearing on your statement but what if someone steals your social security number, somehow gets ahold of your mother’s maiden name and then opens up credit cards in other states? If you don’t take a good look at your credit report you might never know.
- “When I co-sign on a loan the other person is responsible for the loan, not me.” – If you co-sign you’re just as responsible for the loan as the primary applicant. Prepare for the worst so if you don’t want to, or can’t afford to pay off the loan yourself then don’t co-sign.
- “The credit card and loan companies ran my numbers so if they approved me for this amount they know I can handle it.” – While the lending companies have gotten a lot better/stricter about not approving people that they shouldn’t it’s still not good to assume that a company has your best interests in mind. Run your own numbers and only take on what you realistically pay back. Plus some loans (like mortgages) are qualified for by your gross pay and not your take home pay.
- “I’ll freeze my credit card in ice and that will keep me from spending when I shouldn’t, plus it will be there for emergencies!” – With everything being electronic these days and with so many online shopping sites linked up to PayPal (and therefore, your bank account) having a frozen credit card won’t do much to keep the spending wrangled (at least it wouldn’t for me). Instead of using your credit card for emergencies a better plan is to build up an emergency fund and then tap into that if an emergency comes up.
Remember that personal finance is just that – personal. What works for one person might not work for you. Since money is so personal try to not follow the trends; do what works best for you.
What are your favorite urban myths about money and have you ever frozen your credit card? And if so, did it keep you from spending?
* source, image (without text or illustrations) Daniela Vladimirova
P.S. Ready to get out of debt ASAP? Check out the Spending Fast Bootcamp! SpendingFastBootcamp.com
Oh, I know that there are so many myths! I am a paralegal and I work for an attorney that specializes in civil matters such as Divorce and Bankruptcy. We have hundreds of bankruptcy cases that I do much of the case work on. You wouldn’t believe all of the crazy ideas people have about finances. For example, thinking that in bankruptcy you can’t lose anything and you are merely discharging your debts. We have done countless bankruptcies resulting in people losing their homes, cars and even tax refunds.
My personal favorite was a young couple that came in because in their first six months of marriage they were $100,000 in debt. Because they took a loan out on three brand new cars in six months thinking that “getting a car financed will help them build credit.” When, in reality, it ruined them.
My biggest financial tip: It is good to get something financed to show on your credit report that you could. However, pay it off immediately. Do not finance it without the money to pay for it immediately. I know that seems silly, If you have the money, why not just buy it in cash? But, trust me, it will help your credit SO much to show that you can have something financed and have a zero balance for it on your credit score.
Also, just another fun fact: The best way to build credit is to get a credit card with a very small limit. Then, use the card all month long for small expenses like gasoline/groceries. Pay the card off completely at the end of the month, on time. This will show that you consistently have a zero balance and you can pay your bill on time. The absolute easiest way to build credit. My husband and I do it with a $300.00 credit card.
If student loans could be discharged, we’d have no more student loans! It would be too tempting to many, including me. ;)
I LOVED this article! I just tweeted it!
One myth that is false, at least here in Norway where I live, is that all debt is bad. (Note that we don’t have the same credit report system that you have in the US.) At the moment, my interest rate on my mortgage is around 3 %, and the interest rate on my savings account is over 5 %. The logical thing to do would be to borrow more money, let it sit in my savings account, and when the situation changes, pay it back to the bank. I could make hundreds of dollars a year doing that!
The myth about not canceling credit cards is interesting – I had never heard that before! I have two credit cards that I paid off and have been thinking about canceling, so I appreciate that little piece of advice :) Have you written previously about the best way to check your credit score? I know a lot of websites say they’ll do it for free, but it turns out there are a lot of strings attached and “free” doesn’t always mean “free.” Any advice on that would be super :)
We buy in bulk, but only what works for us. Toilet paper from office supply shops – you can never have too much TP if you have somewhere to store it. Flour in 50 lb. increments since I bake constantly. Nuts and oatmeal. Bread loaves when they drop to a ridiculously low price (the one thing I don’t like baking is bread, go figure).
“or shred it and forget it even exists (that’s what I do).”
Be careful with this. Some cards have fees that will get charged (annual fees, lack of usage fees).
“Check your credit once a year (not more than that) ”
I check mine every 4 months. I have the 3 reporting agencies staggered so my yearly free report for each comes up at a different time of year.
It takes 5 minutes, and keeps you engaged and aware of what’s going on. Fixing stuff that broke almost a year ago is hard with your credit.
Hmmm… I have never heard of “lack of usage” fees before. I’ll look into that!
Oh gosh. I WISH they would cut the card in front of me! Some cards allow us to spend over our credit limit so that they can charge us the over limit fee.
I’ve told the bank to NOT allow companies to take the money if the funds aren’t there. I’d rather suffer the embarrassment then pay $25 for cutting it too close. Your bank probably has a similar option.
i have frozen mine before and it kept me from spending for awhile but it eventually got unthawed, then eventually got cut in half and used as craft/floor scrapers lol