Okay, we’ll admit it, there are literally thousands of blogs online giving personal finance advice these days. Not only that but your neighbors, your family and even the mailman seem to have personal finance tips that they think are ‘the best’. The problem is figuring out which of their tips is good and, conversely, bad.
The fact is, what sounds like sensible advice can sometimes turn out to be the worst advice you’ve ever gotten, at least financially. Sometimes what is considered to be the best conventional wisdom is nothing of the sort and, when wide held beliefs turn out to be bad ideas, it’s sometimes good to know what they are so that you can avoid them. The following 4 personal finance tips that you might already have heard about (and maybe even have used our for that matter) should be completely avoided because they aren’t nearly as good as they might sound.
- Using a debt settlement company to pay off your debts. If you are struggling under heavy debt any advice might seem like good advice. Indeed, many debt settlement firms will give you what appears to be a very appealing pitch: sign up with us and we’ll cut down your debts greatly. All you need to do is send them your monthly payments (instead of sending them to your creditors) and they’ll battle those creditors and also banks and credit cards on your behalf.
The fact is, while settling debts is an excellent option for those people who are delinquent on their payments and to have access to a large lump sum of money that they can offer as a settlement, very few people actually fit this criteria. In fact, if this is you then you hardly need a debt settlement company at all.
Even worse, most of debt settlement companies will actually hold onto your payments for several months in some cases before they actually start your settlement process. What this means for you, as the consumer, is that you’re going to have to endure a few months more phone calls from annoying and sometimes rude bill collectors.
- Paying whatever you can pay. Many consumers are under the false assumption that they can pay any amount that they like on a debt that they owe and that this show of ‘good faith’ will oblige their creditors to work with them. The fact is, there’s no such thing as getting ‘extra credit’ for your effort when it comes to debts that are delinquent.
The mistake that people make is that they rationalize that any payment is better than no payment. The fact is, unless you’ve actually worked out an agreement with your creditor to pay a lesser amount than what you should, you’ll find that there’s no automatic agreement that will kick in and protect you if you just send in whatever amount of money that you can orient you want to.
At the end of the day, no matter what arrangement that you’ve made with your creditor you’d best to have it in writing.
- Carrying a credit card balance with the hopes of improving your credit score. One of the biggest misconceptions that many consumers have is that carrying a balance on their credit cards and only paying the minimum payment will be helpful in terms of their credit history. While it is definitely a good idea to regularly use your credit cards for small purchases so that your timely payment history is recorded on your credit report, it’s much better to carry a low or zero balance from month to month.
Carrying a balance doesn’t particularly hurt your credit but, because you’re going to be paying interest on that borrowed money every month, it can actually end up being quite an expensive mistake. Not only that but, if you carry a balance that’s greater than 30% of your credit limit on any single card, your credit may well suffer due to the fact that your utilization ratio is too high.
- Using your 401(k) to pay off your debt. We saved the worst for last as using your 401(k) or 403(b) or, for that matter, any retirement savings to pay off debts is a very bad idea. Indeed, this should be the choice of last resort, even after bankruptcy.
The problem is that all too often many consumers are shocked to find that the taxes they need to pay because of their early withdrawals are very high. Not only that but, once a retirement fund is drained, it could take anywhere from 15 to 30 years to get it back to where it was and, in many cases, a consumer just doesn’t have this luxury of time.
These four personal finance mistakes are repeated on a daily basis all over the United States because, in most cases, the people who are making these mistakes believe that they’re doing the right thing because they’ve been advised to do it by a well-meaning friend, family member or grocery store clerk. (Okay, that last one is a stretch.) If you’re contemplating following any of the four relatively awful tips above, we urge you to reconsider and talk to a real financial expert before you move forward.