These myths could lower your credit score and cause you to spend more money.
Editor’s note: In Part 2 of our Financial Illiteracy Month series we explore the surprising ways consumers damage their finances — when they think they’re protecting them.
Myth #1: It’s always better to use cash instead of credit.
Howard Dvorkin, chairman of Debt.com, has a section in his book Power Up titled “Living without credit cards.” It’s great advice for the intended audience — those who’ve financially hit rock bottom. They won’t qualify for a card. Their goal is to repair their credit.
For anyone else, not using credit is a mistake. Thirty-five percent of your credit score is based on your payment history. Without the use of a credit card, there is no payment history. That could lower your credit score. But if you use a credit card responsibly and pay it off each month, chances are your credit score will improve.
Myth #2: Buying on sale always saves money.
From big-ticket items like 50-inch TVs to everyday stuff like groceries, finding things on sale spurs impulse buying. How many times have you seen a sale on pants or shirts and just bought one? You’re more likely to buy four or five because they’re on sale. And now you’ve just unintentionally spent more money.
Here’s an example on a larger scale. Recently the price of gas went down and the sale of gas-guzzling, expensive SUVs went up. All the automotive industry had to do was run a few sales and people flocked to the dealerships. Any money those people save on gas in the future is automatically cancelled by the amount of gas they now have to buy.
What it comes down to is a matter of wants and needs. You may want that new SUV or four pairs of pants, but do you need them, and can you really afford them? If you can’t, stay away.
Myth #3: You save more money by shopping online.
This really goes hand in hand with buying on sale. Online shoppers love sales and most of the time when they’re browsing a site, they’re prepared to buy. Retailers love it and hand out coupons and other savings tools as incentives. Now they’ve come up with more tricks to make you spend. For example, they’ll add free shipping if you spend a certain amount — which is usually more than you planned on spending — or if you pick up your purchase in-store, where they offer additional sale items.
And this stuff works. Internet Retailer predicts that U.S. online retail sales will grow 57 percent by 2018. Of course there are many reasons why consumers prefer online shopping — convenience, no crowds, and tempting offers. But as online shopping grows in popularity, so will online binge-buying. Don’t waste your money; learn better money management techniques instead.
Myth #4: You should use retirement savings to pay for your child’s college.
Debt.com recently reported that parents are hijacking their retirement account to pay for their children’s college education. Why would parents do such a thing? Parental guilt has a lot to do with it — 63 percent say they feel guilty and 58 percent feel like failures who don’t provide enough for their families.
All feelings aside, this is a terrible way to pay for college because it can totally drain your retirement fund. Parents and kids should chip in and pay together. Educate yourself and your kids on student loans before they apply. And check out The Best and Worst Colleges for Your Money.
Myth #5: Banks are better than credit unions.
Banks try hard to push the myth that they’re the only option you have for banking. The truth is, if you want lower interest rates on loans and higher rates on savings accounts, then try a credit union. Most people just don’t bother investigating the benefits they offer.
The government will help with your investigation at mycreditunion.gov. You can also ask the human resources division at your job. Companies sometimes partner with credit unions and offer their employees the rewards of using their banking services. And check out these five reasons why credit unions are better than banks.
Good luck with avoiding these money myths in the future. Look for Part 3 of our Financial Illiteracy series next week.