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Your Money > Banking Articles > 15 money myths...
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By Sarah Modlock
Last month, not that many of us would have noticed, was Financial Planning Week. It was designed to get us trawling through bank statements, budgeting for the future and filling up our ISAs. It's no bad thing to have something to counteract the other 51 weeks of 'spend spend spend and the deal with the rest later'. I thought this would be a good opportunity to turn money on its head and look at some of the myths that persist and traps you should avoid. Banking 1. I'm better off keeping my money under the mattress. It's easy to feel exasperated with low-paying savings accounts. According to Abbey, we keep £5.4billion in cash hidden in our homes. It's not at my place, I can assure you. But apart from this cash earning nothing at all - not even putting you in line for a Premium Bond win - you run the risk of theft, fire or loss and will probably find that most home contents policies only insure about £500 in cash in the home. 2. I can't switch banks because I have an overdraft. Rest assured that there are many banks other than your own who would love to take the interest you pay on an overdraft and (assuming you can demonstrate an income) would be happy to let you switch it them. 3. Paying bills by direct debit is always cheaper. Well this is certainly true with utilities. In fact recent research by Uswitch shows that you can save more than £200 a year by paying DD. However this works against you with car insurance, where you will almost certainly be charged more for paying monthly, usually around 20% more. 4. If I lock away my savings in a long notice account I get a better deal. This used to be the case but it is increasingly rare these days. Before you sign up to a notice account, take a look at no-notice accounts and see if there is any difference. You could be pleasantly surprised. Current offers on Moneyfacts.co.uk include the Chesham Building Society's Reserve 120 account which, as the name suggest, requires 120 days notice for withdrawals. It pays 2.85% AER compared to the 2.80% AER paid by the no-notice West Bromwich Building Society Saver Direct account. Mortgages 5. I'm renting out my property but don't need to tell the mortgage company. Just about every mortgage contract will require you to notify the lender if you plan to rent out your property. In some cases the lender will allow you to remain on the same rate but other lenders may switch you onto a buy-to-let loan (which is usually higher), particularly if you're planning to rent out the property for a long or open-ended period. You may be tempted to just not tell them but you run the risk of invalidating your insurance if anything goes wrong. 6. I have a nice cheap mortgage because it's interest-only. Yes, your monthly payment will be cheaper but if you fail to save and/or invest for repayment of the capital then you will lose your home. Personally, I am convinced that we will see a big wave of horror hitting interest-only fans in the next couple of decades as their mortgage terms expire but they have no way to pay down the capital. Aim to switch to a repayment mortgage as soon as you can afford to. Credit and debt 7. I need to pay a specialist to get my credit rating repaired. No, no, no. I promise there is nothing that a paid-for service can provide that you cannot do yourself for FREE. It won't happen overnight though. There are three credit reference agencies, Callcredit, Equifax, and Experian, which store information about your credit history. Missed credit repayments stay on your credit report for 36 months, while County Court Judgments are held on file for six years. If you have paid the debt within one month of the CCJ, you can ask the court to remove the details from your record. Get copies of your records (a small fee will apply unless you use a free trial) and the credit reference agency can provide plenty of free tips and advice on how to correct any errors and improve your credit record. 8. The more credit cards I apply for, the better my credit rating will become. Not so. Although having no credit at all can be a problem, lenders will also be put off if you have lots of declined applications. This could signal that you're desperate for credit or having trouble managing your money or existing cards. When you're shopping around for credit, you can ask lenders for a 'quotation search', rather than making full applications. 9. It's easy to solve everything with an IVA. Despite the cheery TV ads, an Individual Voluntary Arrangement (IVA) is not a soft option at all. It is a binding agreement between you and your creditors over how you will repay outstanding debts and is often seen as an alternative to bankruptcy. But just like bankruptcy, an IVA appears on your credit file for at least six years, marking you as a high-risk customer, and making it more difficult for you to get credit. If your agreement with your creditors lasts for more than six years, then the IVA will stay on your credit report for as long as the arrangement lasts. 10. I need to pay for debt help. No you don't. The last thing you need when you're in debt is another bill. You can get free advice from the following organisations, which are all excellent: The Consumer Credit Counselling Service - Call 0800 138 1111 or www.cccs.co.uk; National Debtline - Call 0808 808 4000 or www.nationaldebtline.co.uk and Payplan - Call 0800 716 239 or www.payplan.com. Insurance 11. I don't need travel insurance for my trip to Europe - I have an EHIC card. The European Health Insurance Card, which used to be called E111, is a free card which gives access to state-provided medical treatment only in the EEA and Switzerland. But you are advised to take out comprehensive travel insurance for visits to all countries as there are some things which are not included and the EHIC will not cover the costs of getting you home. If you have free travel cover through your credit card or similar then make sure you read the policy through carefully so that you don't get let down by any nasty surprises if you need to claim. 12. Buying a joint-life assurance policy saves money for couples. "In fact," says Kevin Carr, Director of Protection Development at PruProtect, "it is often better value for money to buy a single policy each." 13. The state will look after me. Yes, if you're happy to live on bread and water for 30 years. That's all you will be able to afford on the meagre payouts. Incapacity Benefit (if you can't work for long periods due to illness or injury) currently provides £67.75 a week. Would that cover your mortgage, bills and living expenses? 14. I can start saving for a pension when I'm older. You can, but bear in mind that the sooner you start saving, the better off you will be when you need the cash because your pension savings need a chance to grow over time. Delaying for ten years could half your pension. Even small amounts grow to huge sums if saved for long enough through the magic of compound interest. When working out how much you should save think about the lifestyle you want when you retire and calculate how much you can afford to contribute towards your pension fund each month. You will also need to take into account when you want to retire and whether you have income from other sources. Typically none of us can afford to save as much as we ideally should, so just put away as much as you can as soon as you can. 15. My house is my pension. Great, but remember you have to sell it and live somewhere else to realise any value. It's also very hard to predict what the property market will be like when you need to cash-in. You're also missing out on the tax-breaks that come with pension contributions. All figures correct as at 8 September 2009.
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