Reports suggest that roughly 77% of American households have some form of debt. With so many challenges facing them, it’s unsurprising that many millennials struggle with money. The key lies in avoiding four common money mistakes when borrowing money.
Millennials grew up when financial stability declined and borrowing was rising. We were born into a world where living paycheck to paycheck was normalized entirely, and many of us have never known anything else.
Due to rising costs of living and stagnant wages, many millennials face financial challenges. When times are tough, you must know how to deal with debt and borrowing correctly to avoid getting into trouble.
Unfortunately, millennials have many common misconceptions about borrowing money, which causes them to make poor financial decisions. These are some of the most common money mistakes and myths millennials believe about lending money.
Borrowing Money Is Always Bad
It’s important to note that borrowing money isn’t always bad. Sometimes, borrowing money can be the best way to get through until payday. The problem occurs when you borrow too much money and use your credit card on purchases you can’t afford.
Many people use their credit cards to pay for food or household items as they don’t have the cash. They then pay off the purchase at the end of each month, so they don’t incur any interest. That’s fine if you can pay your monthly debt back in full.
But, many millennials are struggling financially and can barely afford their rent, let alone expensive monthly repayments. In this situation, borrowing isn’t a good idea.
Borrowing can be a solution when faced with unexpected expenses such as car repairs or urgent home maintenance.
In this instance, borrowing from companies like Wise Loan, which offers responsible short-term loans, can help you cover those expenses. The alternative is to spend money you can’t afford and then fall behind on other bills, like rent and utilities. This is never a good idea because it will only land you in a worse position.
Borrowing is also essential because it helps you build your credit score. Lenders use your credit score to determine whether you qualify for a loan based on your financial reliability. A good credit score makes qualifying for savings accounts and loans with a lower interest rate easier.
In the long run, building your credit history will benefit you if you start early. Follow the link to learn five ways to make your credit score, and you’ll see that you need to borrow money to build a credit score.
If you don’t have a good credit score, you will struggle with getting a mortgage or a car loan in the future. So borrowing money can be beneficial, in some cases, if done responsibly and paid off quickly.
Paying The Minimum Payment On Credit Cards Is Fine
When you borrow money on a credit card, there will be a minimum payment that you have to meet. If you meet that minimum, you won’t have to worry about the credit card company asking you for money.
Millennials often think they are acceptable if they make those minimum payments, but that isn’t true. Ultimately, you’re only clearing a tiny amount of the actual debt. The interest keeps building, and the amount owed grows.
For example, if you borrowed $1,000 from a lender and only repaid $100 monthly, it could take years to pay back the total amount because of how compounding interest works.
When money isn’t used to repay a debt, it’s added onto the original debt and accrues interest (thus “compounding”). In addition to interest rates, late fees, and the fact that the payments are not tax-deductible (unlike student loans), paying $100 monthly with a 10% interest rate is quite expensive.
It’s much better to pay off more than the minimum amount to clear the debt quicker and avoid all the interest.
Checking Your Credit Score Will Hurt Your Score
Millennials often assume that checking their credit score will negatively affect their credit score. But it is a great way to ensure that everything looks right. After you have made sure there are no errors in your report, keep an eye on it for any new information after you ensure it is free of errors.
Checking your credit score before applying for a mortgage is also a good idea. If there are errors in your credit report, you could run into trouble when it comes time to sign the final papers. It would be embarrassing and costly if they rejected your application after all that work.
Another benefit of checking your credit score is seeing how lenders view you and whether or not they trust you. If there are some negative marks on your history, they might think you won’t repay the loans responsibly. If everything looks good, you’ll likely get approved for a loan.
Lenders like to see borrowers who have built credit through responsible borrowing.
Understanding your credit score and knowing whether there is a problem is crucial if you want to look after your money well. But if you don’t check it, you won’t know what state your finances are in.
You Should Always Pay Off Debt As Fast As You Can
Sometimes, paying off your debt as soon as possible is wise. For example, if you have a credit card or a loan with a high interest rate, it is recommended that you eliminate your debt quickly. However, paying off your debt may not always be the best decision. Holding onto your debt and focusing on other financial goals in certain instances may be more beneficial.
Certain debts have tax advantages, like mortgages and student loans. If these are low-interest loans and they are not causing you too much trouble, paying them off at a slower rate may be better. You will have more money to put into an emergency fund, which you can use to protect your finances.
People often get into debt due to unexpected expenses and a lack of emergency funds. Building a savings account can prevent this and provide financial security.
How Can Millennials Borrow Money Sensibly?
Yes, it is possible to borrow money sensibly. Start by comparing loans from different lenders and sorting them into low-interest rates (or none at all) and those with high-interest rates.
It’s worth being cautious when accepting offers that appear great, as hidden fees or additional charges may increase the amount you owe. To manage your debts effectively, sort them from highest to lowest interest rate and focus on paying off the ones with the most expensive repayments first.
Using credit cards can make it challenging to pay off debt. Try to stay away from using them as much as possible. Don’t overspend while using your credit card because this may get you in trouble.
Don’t take out loans for things that will depreciate, such as clothes and consumer items. You should spend your money elsewhere rather than sinking it into a project that will not ensure your long-term success. It’s best to avoid significant expenses like these to keep your finances clean and straightforward. Lastly, remember that borrowing money includes mistakes made by missing payments or late-payments – avoid doing this.
Many millennials are worried about borrowing money, but as long as you educate yourself about how to do it responsibly, it can work in your favor.