Don’t fall for these 6 financial myths
What do credit cards, your credit score and saving money have in common? They’re all financial topics that many people have misconceptions about. In honour of Financial Literacy Month, we’re tackling some common financial myths and will outline how believing the following statements can actually hold you back financially:
- A credit limit increase will negatively impact your credit
- There is only one type of credit score
- Only making minimum payments is okay
- Closing a credit card will help your credit score
- A soft credit check will hurt your credit
- People who have a good job and are good with money don’t need a budget
If you believe at least one of these statements is true, let’s change your mind – keep reading to find out why this type of thinking may be hurting your finances.
Myth #1: A credit limit increase is bad for your credit
Hesitant to accept a credit limit increase from your credit card? Our advice is to take it – a higher credit limit can lower your credit utilization. Credit utilization is the ratio between your outstanding balance compared to your credit limit. The lower your credit utilization, the better it is for your credit (a good rule of thumb is to keep your credit utilization below 25%).
Still not convinced? Consider this example:
Let’s say you have a credit card limit of $1,000 and your outstanding balance is $500. Because you’ve made on-time payments and demonstrated positive credit behaviour, your credit card company offers you a $1,000 credit limit increase, bringing your total credit limit to $2,000. Before the credit limit increase, your credit utilization was 50% (well above the recommended amount). After the credit limit increase, your credit utilization automatically lowers to 25%, which will have a much more positive impact on your credit score.
Tip: The trick here is to not rack up a balance that with your new, higher limit. Also, if you’re worried about potential fraud issues, it’s better to keep your credit limit on the low side.
Myth #2: You only have one credit score
In Canada, there are two main credit bureaus that financial institutions use to access your borrowing history: Equifax and TransUnion. These credit bureau’s use two different models to calculate your credit score. So, depending on what company you’re using to monitor your credit, or what financial institution you’re applying for credit at, you may see discrepancies between these two scores. On top of this, not all companies report to both bureaus.
Myth #3: As long as I make minimum payments, I won’t get in to trouble with my credit cards
While making minimum payments is better than not making payments at all, it will still impact your credit (and your financial situation) in several ways. Consistently carrying a credit card balance will impact your credit utilization over time, which in turn will impact your credit. And, interest will accrue on your credit card balance. As interest continues to compound, your payments may become too expensive and unmanageable causing you to miss payments. Not to mention, no one wants to spend money on interest if they don’t have to.
Depending on your situation, a debt consolidation loan might be a good solution if you’re unable to pay down your credit card balance in full. You’ll be set up with a scheduled and structured repayment plan, meaning you’ll pay the same amount each month until you’ve paid off the loan.
Myth #4: You close credit cards after paying them off
If you’ve had trouble with your credit card balances in the past and finally pay them off, you might think you’re doing a good thing by cancelling them. However, keeping credit cards available and demonstrating that you can use them responsibly is a positive thing for your credit. Unless you absolutely can’t resist spending more on your cards than you can afford to pay back, you should try to keep them open. After all, the next step after paying down debt should be developing healthy spending habits so you don’t get yourself into the same situation again.
Myth #5: A soft credit check will impact my credit
A soft credit check won’t impact your credit. There are two types of credit checks – a soft credit check and a hard credit check. Often, lenders will offer a soft credit check that’s a quote or estimate of how much money you can borrow. This is a great way to shop around for the best rates without impacting your credit score. A hard credit check is visible to other lenders. If there are too many hard credit checks on your report in a short timeframe, lenders may interpret this as credit-seeking behaviour and may be less likely to lend money to you.
Tip: Singing a lease for a rental accommodation, or switching to a new cellphone provider can trigger a hard credit check – make sure you always read the fine print and understand if a hard credit check is being performed.
Myth #6: I make “x” amount of money/I have good savings habits/I have a good job so I don’t need a budget
If you make a lot of money, or have a stable job, good for you! That’s a step in the right direction for your financial stability. However, there are many people who get themselves into financial trouble even when making an above-average salary. And, even if you’re already saving money, there’s always room for improvement.
Laying out all your expenses and spending in front of you can help identify areas of opportunity where you can cut back on extraneous purchases and save for an emergency fund or retirement instead. For example, maybe you realize you’re paying for two types of music-streaming services, or maybe you enjoy eating out once a week but end up throwing away food you buy from the grocery store. A budget is necessary – no matter what job you have, how much money you make or how good you think you are with money.
Tip: Some people get discouraged quickly when they go over their budget – don’t worry. A budget will constantly need to be refined so that it helps you meet your financial goals. And, life happens! Learn from your mistakes and move on.
Finances can be confusing. And, it doesn’t help when there’s misinformation floating around. Head over to our Facebook page – we’re busting financial myths all month long. Or since you’re already here, check out our other blogs for more financial tips.
Interested in a loan? Try our free loan quote! In just a few minutes, we’ll tell you how much money you could qualify for and what your payments might be. No obligation and no impact to your credit score.