Have you been bombarded by financial advice from all directions? If so, the quality of that advice has probably ranged from high-quality researched opinions to the random philosophies of your fellow shoppers in a grocery store checkout line. How do you decide which advice to take?
We have already told you some bad financial advice that you should NOT follow. Here are seven more financial "tips" you should dismiss out of hand.
1. Closing Old Credit Accounts Helps Your Credit Score – Closing old and unused accounts will generally harm your credit score for several reasons, primarily because your credit utilization — the amount of credit you use versus the total amount available — will rise. Using a higher percentage of your credit implies higher risk to your remaining creditors.
2. Save Money By Refinancing Your Auto Loan – It's possible to save money this way, but not likely. The main reason why is that cars depreciate so rapidly that you are likely to end up owing more than the car is worth even after refinancing, and you also are likely to have extended terms that will cost you more in the long run.
3. Always Pay Points to Lower Your Mortgage Interest Rate – Points, or upfront money paid at closing to lower your interest rate, may be a good deal for you but they are not guaranteed to be so. For example, if you only stay in the home for a few years you will never recoup the points you paid through interest rate savings. Online calculators are available to help you decide if points are right for your situation.
4. You Won't Be Audited If You Don't Make Much Money – The red flags that can eventually lead to an audit do not always correlate to high income. Mismatched information or missing forms are classic examples. The Earned Income Tax Credit, applicable to low-income taxpayers, can also been a source of scrutiny because of the nearly one-quarter rate of estimated improper payments (according to the IRS). Keep track of your tax information no matter how much you make.
5. Always Select the Credit Card with the Lowest Interest Rate – Interest rates are only important if you carry a balance — and even then, there may be cash-back rewards, perks, or other factors that make a card with a higher APR more desirable in your case. Evaluate credit cards as an overall package instead of focusing on any one aspect, including the interest rate.
6. Pay Off Your Largest Debts Before Saving Money – Do not sacrifice your savings just to pay down debt. It's important for your savings and investments to have time to grow.
As for the type of debt to pay, the interest rate associated with a debt is more important than its size. Make at least the monthly minimum payment on all debts to avoid penalties, and then apply the extra cash to where it will do the most good. Typically, a better strategy is to pay down debts with the highest interest rate first to minimize the total amount of money that you pay.
Some consumers prefer the psychology of paying off the lowest balance amount first just for the sense of completion — and if that keeps you on track, fine. However, you will generally pay more using that approach.
7. Credit Monitoring and Identity Theft Protection are the Same Thing – Generally, these are two different and complementary services. Credit monitoring is usually reactive, and lets you know about suspicious activity on your account. Identity theft protection and fraud alert programs are usually proactive and designed to prevent account breaches. Check the terms of any of these services to understand exactly what you are purchasing. The Credit Manager by MoneyTips offers both.
The quality of advice may not always fit the source. Perhaps your financial advisor is not competent, or perhaps the clerks at your local grocery store are all Certified Financial Planners. The main point is to use common sense when digesting financial advice and to double-check it with multiple sources. Use the internet and other available resources — and remember that if something sounds too good to be true, it probably is.