Reports suggest that roughly 77% of American households have some form of debt. With so many challenges facing them, it’s not surprising that many millennials struggle with money. The key lies in avoiding four common money mistakes when borrowing money.
Millennials have grown up in a time when financial stability is in decline and borrowing is on the way up. We were born into a world where living paycheck to paycheck was completely normalized, and many of us have never known anything else.
Due to rising costs of living and stagnant wages, many millennials are facing financial challenges. When times are tough, you must know how to deal with debt and borrowing in the right way, so you can avoid getting into trouble.
Unfortunately, there are many common misconceptions that millennials have about borrowing money, which causes them to make poor financial decisions. These are some of the most common money mistakes and myths that millennials believe about borrowing 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 for you to get through until payday. The problem occurs when you borrow too much money and use your credit card on purchases you couldn’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 completely at the end of each month, so they don’t incur any interest. That’s fine if you can afford to pay your monthly debt back in full.
But, a lot of 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 help you out of a difficult financial bind when you are hit with unexpected costs. If your car breaks down or you need to do maintenance on your home, for example, you may find yourself in need of quick cash.
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 that 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 important 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. Having a good credit score makes it easier to qualify for savings accounts and loans with a lower interest rate.
In the long run, building your credit history will definitely benefit you if you start early. Follow the link to learn 5 ways to build your credit score and you’ll see that, in order to build a credit score, you do need to borrow money.
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. You won’t have to worry about the credit card company asking you for money if you meet that minimum.
Millennials often think they are fine as long as they are making those minimum payments, but that isn’t true. In the end, 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 per month, it could take years to pay back the full amount because of how compounding interest works.
When money isn’t used towards paying back 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 a month with a 10% interest rate is quite expensive.
It’s much better to pay off more than the minimum amount so you can clear the debt quicker and avoid all of 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 your report for any new information after you ensure it is free of errors.
It is also a good idea to check your credit score before applying for a mortgage. If there are errors in your credit report, you could run into trouble when it comes time to sign the final papers. If they reject your application after all that work, it would be embarrassing and costly.
Another benefit of checking your credit score is that you can see how lenders view you and whether or not they trust you. If there are some negative marks on your history then they might think that you won’t repay the loans responsibly. If everything looks good, then you’re more likely to get a loan approved.
Lenders like to see borrowers who have built credit in the past 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 have a clue what state your finances are in.
You Should Always Pay Off Debt As Fast As You Can
In some cases, paying off your debt as quickly as possible is the right thing to do. Try to eliminate your debt quickly if you have a credit card or loan with a high-interest rate. However, there are some situations when paying it off quickly isn’t the right move.
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, it may be better to pay them off at a slower rate. You will have more money to put into an emergency fund, which you can use to protect your finances.
The reason that people often get into debt in the first place is that they are forced to borrow because they don’t have an emergency fund to cover additional expenses. Building your own savings account to fall back on is one of the best things you can do.
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 the ones that have low-interest rates (or none at all) and those that carry high-interest rates.
Although there may be some out there with a great offer, it can still be worth taking up to check for hidden fees or extra charges on top of what you owe. Sort your debts in order of highest interest rate to the lowest interest rate. Make sure that the debts with the most expensive repayments are paid off first.
Using credit cards can make it difficult 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 end up getting you in trouble.
Don’t take out any loans for things that are going to depreciate in value 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. In fact, it’s best just to avoid large expenses like these in order to keep your finances clean and simple. Lastly, remember that borrowing money includes mistakes made by missing payments or making late-payment – avoid doing this at all.
A lot of 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.