Financial Facts vs. Fiction: 5 Money Myths You Should Avoid Falling Victim To
Think your family can decide how to split your wealth after you pass away? If you answered yes, think again…
Sadly, the recent loss of music legend Prince is a good reminder of this harsh reality. Prince left behind an estate that is estimated to be between $150 million to $350 million. But, he did not have a will, which would have outlined exactly how he would have liked that money to be distributed. Now, without that document, the court will decide how to split up his fortune.
Whether you are rich or poor, famous or not, personal financial management is extremely important.
According to a recent study from two economists, Annamaria Lusardi and Olivia Mitchell, people are prone to overestimate how much they know about money. When asked to rank their financial knowledge on a scale of 1 (very low) to 7 (very high), 70 percent of the Americans surveyed by Lusardi and Mitchell ranked themselves at level 4 or higher. Yet only 30 percent of them got all three questions on a simple finance quiz right.
While not understanding your finances is dangerous, it is perhaps even more problematic to be misinformed.
To help test your understanding of a few important fundamentals, see if you can separate financial facts from fiction in the below:
True or False: The number of credit cards you own will directly impact your credit score
False. The number of credit cards alone will neither help nor hurt you. There is no impact to your FICO score. That said, there are other considerations to be aware of.
Every time you apply for a new credit card, your credit score may be impacted. If applying for new cards, try to keep a minimum interval of 6 months between applications in order to limit any negative impact to your credit score. On the other hand, if you’re considering closing an old card, think twice. Remember that the “age” of the credit card accounts you hold is one of the factors used to determine your credit score.
If you already hold multiple cards, note the payment dates for each respective card in order to avoid late charges and accrued interest. By using several cards, you may benefit from different rewards strategies and are also able to lower your credit utilization since you have a larger overall limit.
True or False: If you do not owe taxes, you can file your federal income tax return after April 15th
True. If you’re in a position in which the IRS owes you money, then you actually do not need to file by April 15th and you will not incur a penalty; however, if you find yourself owing the IRS, then you will incur a penalty that is equivalent to a percentage of the tax you owe. As a good practice, it is always best to meet the deadlines regardless of whether you owe the IRS or the IRS owes you. After all, if you’re due to receive money, the sooner you file, the sooner you’ll get the return in your account.
True or False: You can only contribute to a 401(k) retirement plan with pre-tax money
False. The important distinction here is to determine whether your plan is a traditional 401(k) or a Roth 401(k). This will determine whether pre-tax or post-tax dollars are used to fund the account. Traditional 401(k) contributions are made before taxes and help you reduce the amount of income that you will need to pay taxes on. So, you don’t pay taxes today but you will when you withdraw that money during retirement. A Roth 401(k) allows you to contribute after-tax dollars, which means that you have already paid taxes on those amounts. In retirement, your contributions and their earnings can be withdrawn tax free.
True or False: FICO scores above 700 allow you to qualify for the best interest rates
False. For the best rates, having a credit score around 700 is not enough. Typically, scores in the mid-700s will allow you to obtain the best rates. Approximately 25% of adults have scores that range from 750 to 799. The power of this number should not be underestimated given it affects your ability to get a loan, obtain a particular interest rate, and can even help determine how much you might pay for insurance.
True or False: You only have 3 credit scores (one from each credit bureau)
False. You can actually have many more than 3 scores. The key point to remember is that not all of them are equally valued. The scores from the 3 major credit bureaus (Experian, Equifax, and TransUnion) are responsible for providing data on your credit; however, there are many more scoring models beyond these.
When you hear the word FICO, that refers to the most popular scoring model. If a lender were to review your credit score, it will likely do so by looking at your FICO score, which was determined by one of the three bureaus. There are other models that also generate scores and this is typically what you see on other free scoring sites. These sites are likely using the VantageScore model. Keep in mind that while these scores can give you a sense for your overall credit health, they may not be the same numbers that your creditors will see.
If you really want to know what your FICO score is, you can purchase it from one of the major bureaus for about $10 to $20. Be sure to specify that you want the FICO version and not their proprietary ones. Lastly, keep in mind that many credit card issuers now offer their customers free FICO scores from one of the bureaus.
Focusing on financial wellness should be an ongoing exercise and not something you do every once in a while. Fortunately, there are many tools available to help you take control of your financial well-being. From free credit reports to financial wellness educational programs, you can take advantage of the resources to help develop a more comprehensive understanding of your finances. Ultimately, being financially secure will help minimize stress and allow you to focus on achieving your dreams.