Top 5 Money Misconceptions
When I was a teenager, I made a lot of assumptions about how money and credit work. After all, it’s not like there’s a checking account course in high school! Here are the five biggest money misconceptions that plagued me in my youth.
“Who Reads the Fine Print Anyway?”
I don’t really know why, but I assumed that no one ever read all the fine print when opening a bank account, applying for a credit card, or even purchasing a car. It’s like the iTunes terms & conditions, you just click “yes” to get to what you want.
But when you’re buying something or signing your name to a document, it is very important to read and understand what you are signing. Once your signature is on something, you will be held responsible for it, so be sure you know what you are signing up for.
“A Few Bounced Checks Won’t Kill Me”
Well, a few overdrafts certainly won’t put your life at risk, but they are sure to put your credibility at risk and can compromise your ability to open credit and other accounts in the future.
When you overdraft from your account you are using money that you don’t own, and that means you are borrowing money from the bank and its other customers. That is why the bank charges overdraft fees. Consider these fees to be interest on a totally unexpected loan you took out at the last minute without asking. If you overdraft too many times or stay overdrawn for too long, you run the risk of having your account forced closed by the bank. If this happens, you may have a difficult time opening another bank account, obtaining credit cards or getting any type of loan.
For some tips on how to avoid over drafting your account, check out Annu’s post here.
“I Only Have to Make the Minimum Payment on my Credit Card”
Making the minimum payment on a credit card exponentially increases the cost of items or services you purchased with that card. It can also take years to pay back.
Let’s say you have $3,500 in credit card debt at 18% interest rate. Paying the minimum payment each month, it would take you 238 months (almost 20 years!) to pay off the total balance. You also end up spending $4,673.24 in interest alone. Now, let’s suppose you pay an additional $10 each month over your original minimum payment (total of $97.50) on that credit card. You are now down to 52 months to pay the card off completely and $1,563.83 in interest paid. Still not what I would consider a fantastic deal, but much better, right? Check this site out to play with their nifty payment calculator to see some different options and crunch your own numbers.
“Paying Late isn’t a Big Deal – All the Cool Kids Do It”
No they don’t. Paying late can have a very negative effect on your credit score. Having a low credit score can make it more difficult to get an apartment and move out of Mom and Dad’s house. A low credit score can keep you from landing your dream job. A low credit score can increase your interest rate on credit cards, mortgages, and anything else you finance. There’s nothing cool about any of that!
“I Don’t Have to Worry About my Credit Score Until I’m ‘Grown Up’”
The folks looking at your credit score are not likely to be forgiving just because you are young. I had a hand in financing my college education and ended up going a little crazy with credit cards. I did not worry about my credit score at all. As a result, it took 7 years — ¼ of my entire life — to get back on track.
Has anyone else come across other common money or credit misconceptions? How about things you wish you knew just 5 years ago?