There are many money myths about personal finance and debt affecting millennials. It’s no surprise given the financial state they are facing.
- News about student loan forgiveness impacts borrowers.
- Inflation continues to put pressure on budgets. From groceries to gas, record-breaking inflation means the purchasing power of money is decreasing each month.
- Rising interest rates are also putting a squeeze on finances, making it more costly to borrow money. Worries about an inflation are also rampant.
- Even with the longest payment pause in history, student loan debt is also crippling for millennials and Generation Z. Americans owe over $1.4 trillion in student loan debt, which is spread out among nearly 44 million borrowers. Furthermore, the average amount of student loan debt for a graduate of the Class of 2016 was approximately $37,172.
- Student loan debt isn’t the only major issue surrounding students and young adults; young Americans (age 25-34) have the second highest rate of bankruptcy after Americans 35-44, and nearly 1 in 5 Americans ages 18-24 qualify themselves as being in “debt hardship.” These findings suggest that the younger you are, the tougher your financial situation seems to be.
Unfortunately, not all of it is true. This article from GreenPath Financial Wellness takes a look at a few of the important facts and myths:
1. Applying for a loan or credit card doesn’t hurt your credit.
This can be true in certain cases, but in general, if you’re applying for a loan or a credit card, your credit score may decrease.
Anytime you apply to borrow money, your credit score is pulled. This is called a hard inquiry. Hard inquiries on your credit can cause your score to drop. On the other hand, soft inquiries don’t affect your score.
The good news is that if you apply for a loan and you’re shopping around, the credit bureaus will cut you a break. They understand you’re trying to get the best deal. They count all inquiries in that timeframe as one single inquiry, as long as you do your shopping within a 45-day period.
2. Refinancing your loans is always a good idea. Depending on your situation, student loan refinancing is a great way to negotiate a lower interest rate, a longer payment schedule, or both. It can also help make your loan payments easier to manage. Refinancing private student loans is nearly always beneficial, but you’ll want to be careful when it comes to refinancing your federal student loans. When federal student loans go through the refinancing process, they’re typically converted into private student loans.
This makes them ineligible for other income-based repayment plans. Depending on the various types of student loans you have, there are specific repayment plans that may help you better afford your monthly payment.
Since federal student loans are usually treated differently than private student loans, it’s a good idea to talk to an expert before choosing to refinance any student loans.
3. Paying off debts will instantly repair a credit report.
Not exactly. Credit reports provide an overview of your current credit standing and your credit history. Most negative information will remain on your credit report for up to seven years. Negative items located under the “Public Record” section of your credit report, such as judgments or bankruptcies, typically stay with you for up to 10 years. Paying off debts will improve your credit report and credit score, but it won’t erase all past problems. That requires time.
4. Monthly student loan payments are based on what you earn.
There is some confusion on this topic so let’s provide some clarity on this.
For private loans, if your payments are too high, then you can apply for an income-driven repayment plan through your servicer, with the caveat that this step will ultimately make your loans more expensive over time. The most important thing to keep in mind with any debt you have is to keep communicating regularly with your lender/creditor. By knowing your options, they can assist you if you’re unable to afford the payments required.
5. Debt consolidation is only for people who can’t handle their finances. Most likely, undisciplined spending is why you’re looking at debt consolidation, but that’s not always the case. Often, life throws expensive curveballs such as home repairs, medical bills, and career changes. Many people take advantage of the curve-balls and work to use that time to restructure their debt and take advantage of lower interest rates. Regardless of why you choose debt consolidation, it is a chance to get your finances in order and assist you in reevaluating your financial goals.
Get back to Budget Basics
Given these money myths facing millennials and others, getting back to budget basics helps people get on firm financial footing.
Take inventory of your full financial picture. Has your household income changed? Have you adjusted for rising grocery, transportation or other expenses? Check your existing budget to see where you stand and where your money is going. What’s your current balance of credit card debt, student loans and other debt?
If you don’t have a budget, it can help to create a simple spending plan or roadmap of monthly expenses. A good place to start is to use a budgeting worksheet to track your monthly income against current expenses.
You don’t have to go it alone. Contact the credit union for assistance with budgeting, building or repairing credit, or debt consolidation – after all, we exist solely to serve you!