Is buying a home always better than renting? Should you close credit cards after paying them off? If your answers to both questions are yes, you believe some of the most common money myths. April Lewis-Parks, director of education and corporate communications at Consolidated Credit, says not understanding how credit works can be very dangerous.
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“They go along thinking they are doing the right thing, only it's really damaging their credit score,” she says. “If you have a low credit score, you are paying more for credit and loan products in the future. It can cost people hundreds to thousands of dollars if they don’t understand how to use credit the right way.”
Lewis-Parks shared some of the most common money myths and how to avoid them:
MYTH: Making the minimum payment on your credit card is a responsible way to pay them off
Lewis-Parks says credit card companies make people believe that all they have to pay is the minimum payment. From their point of view, that is all you need to pay.
“Whatever balance you have on the card will keep accruing interest,” she says. “Everyone should try to pay off their credit cards every month. That is still going to give you an excellent credit score because 35 percent is paying on time.”
Do you have a large purchase on your card that prevents you from paying it all off? Lewis-Parks suggests making a payment every two weeks instead of once a month.
“When you are paying it every two weeks, the interest accrues usually on a daily average balance,” she says. “So you’ll be paying less interest as you are paying the debt off.”
MYTH: Buying a home is always better than renting
Many people believe that buying a home is part of the American Dream. Lewis-Parks warns that purchasing a home is not always the best financial move. She stresses that everyone should look at their own financial situation.
“For some people, if they have a really good deal with renting, it can be much better than trying to own a home, make the monthly mortgage payment, get the insurance and maintain the home,” Lewis-Parks says. “A home can be very costly to heat and keep up with repairs. If you have a great rental and love the area, you won't have to worry about maintaining the property and the liability is so much less. There are so many other ways to build wealth other than owning a home.”
MYTH: You don’t need to make a 20 percent down payment on a mortgage when buying a home
While you may be able to buy a home with less than 20 percent down, you will have to pay private mortgage insurance or PMI. PMI is insurance you pay every month to protect the lender in the event you default on the loan.
“PMI insurance can be anywhere from $100 a month to $500 a month,” says Lewis-Parks. “That insurance money doesn’t go to paying the balance. It doesn’t go to the principal and it doesn’t go to your interest. It’s basically money into the ether.”
If you are a first-time homebuyer who is having trouble saving the 20 percent, she suggests looking into down payment assistance programs.
MYTH: You should always close credit cards after paying them off
Finally! The day is here when you have paid off your credit card debt. You may be so relieved that you want to close your credit cards and be done with them altogether. Don’t do it. Lewis-Parks says what most people don’t realize is that closing a card affects your credit utilization ratio – which is the amount of your credit card balance compared to the credit limit. When you close a credit card, the utilization rate jumps up and your credit score goes down.
“If you need to get another credit card or some other type of loan product, you are going to pay higher interest,” she says. “Pay off the credit card, just don’t close them. You can destroy them if you don’t want to use them anymore. Place them in the freezer or put them away.”
Length of credit is a big factor in credit scoring. Lewis-Parks says if you’ve had a card for a long time and don’t use it, it's best not to close it. Keep it open and let the credit history length strengthen your credit score.
MYTH: Secured credit cards are bad
A secured credit card is a credit card that requires you to place a deposit of your own money as collateral for the card. The deposit becomes your credit line for the account. Lewis-Parks says some people mistakenly believe that secured credit cards are less of a product. She says those types of cards can be beneficial if you have a limited credit history.
“You don’t get into debt with a secured card, because you are already giving them the money upfront,” she says. “You are making purchases with your money, but it reflects really well on your credit report and it can help strengthen your credit score.”
Linda Bell joined FOX Business Network (FBN) in 2014 as an assignment editor. She is an award-winning writer of business and financial content. You can follow her on Twitter @lindanbell