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Personal Finance Myths

In the world of personal finance, it can be hard to separate fact from fiction. We debunk five personal finance myths to give you better clarity.

As with most things, personal finance has its share of misinformation.

There are many financial myths that often cause concern for those who worry about the state of their finances. Getting behind the truth of personal finance and separating the facts from the myths can help you make smart choices about your money.

We have busted five personal finance myths to help you stay calm as you make those all-important financial decisions.

Myth: I need a massive deposit to get a decent mortgage

Reality: There have been several government schemes introduced in recent years, such as the Lifetime ISA. This allows you to save up to £4,000 a year, which the government will top up by 25%.

The decrease of interest rates has resulted in mortgages falling in price. The average fixed rate for a 95% loan-to-value mortgage in July 2014 was 5.33%, and it has since fallen to 3.64% (September 2019)[1].

You should shop around for the best rates. Don’t just look on the high street but use comparison websites or consult a broker who may have expert knowledge on the best deals.

Myth: Paying my bills by direct debit is cheaper

Reality: Paying your gas or electricity bill by direct debit is often cheaper as it reflects what you have used and can help spread the cost. But this isn’t the case when it comes to car insurance.

For some people, it isn’t always possible to pay your car insurance upfront, which is why many providers will offer for you to pay in monthly instalments. This might be beneficial in the short term, as it means you don’t have to pay the yearly cost all at once. However, there will be an interest rate added to your monthly payments, meaning you will end up paying more over time.

Myth: I am too young for a pension and I can use the state pension anyway

Reality: This is a common financial myth that really needs to be debunked.

If you’re in your twenties or thirties, retirement can seem like a long way off. With youth on your side and other financial commitments, like a mortgage deposit or monthly bills taking up a chunk of your earnings, it’s easy to put off saving for retirement. But where will you get your income from when you are no longer working?

Starting your pension as early as possible could ensure you have a bigger pot invested in the markets and will hopefully ensure a happy and wealthy retirement.

Investing as early as possible also gives you a better chance of making up for losses over time. You can start with a smaller contribution and build it up as you get further into your career.

Your workplace should offer a pension scheme that both you and your employer will contribute to. Talk to your pension provider about your saving options to find out what works best for you and your current financial situation.

Myth: It is illegal to avoid tax

Reality: Big banks and businesses are constantly in the news for failing to pay enough tax or any at all. This is known as tax evasion, which is quite different from tax avoidance.

There are perfectly legal ways to avoid tax, often known as tax relief.

Everyone has a personal allowance they can earn before paying tax. You can also save and invest money in a cash or an investment individual savings account (ISA) tax-free up to a set limit, which was £20,000 in 2018/19.

Putting money into a pension also gets tax relief. There are other more sophisticated products too, such as Venture Capital Trusts and Enterprise Investment Schemes.

Myth: I have never had a loan or credit card, so my credit rating is fine

Reality: One of the most common financial myths is how avoiding taking out a loan or using a credit card will improve your credit score. In fact, it’s quite the opposite.

Whether you are applying for a phone, mortgage or credit card, a provider will want to know about your ability to repay. The first port of call is your credit rating, which is a record of all your debts, borrowings and financial products, such as cards, savings accounts or broadband contracts.

To approve your application, providers need to see evidence that you can manage debt sensibly. So even if you have no credit or debts, your rating may still be low. If there’s evidence of you taking out a loan or using a credit card and consistently meeting the repayment agreements, this will reflect positively on your credit rating.

It may be worth taking out a credit card, spending some money and ensuring you repay fully each month to build up your rating.

Find out more about how to better handle your personal finances with our Know How blog.

Information on Lifetime ISA and ISA allowance updated October 2020.

[1] https://www.mortgagefinancegazette.com/lending-news/fall-number-95-ltv-mortgages-09-09-2019/


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