12 Myths About Debt You Need To Stop Believing Right Now

Don't let these 10 debt myths hold you back from financial freedom.

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Updated May 28, 2024
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According to the New York Federal Reserve Bank, Americans hold more than $17 trillion in debt as of June 2023. This includes credit card debt, car loans, mortgages, and more.

You probably contribute to some of that debt, and you’re trying to pay it off. But you may not realize that your ideas about that debt may not be accurate.

Take another look at the debt you may be carrying and see if dispelling these myths could help you get out of debt faster.

Debt hurts your credit score

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Debt in and of itself doesn’t hurt your credit score. How you manage your debt is what creditors look at. You can pay your debts but still get dinged if you pay them late or miss too many due dates.

Your score could go up if you have debt like a car loan or mortgage that you pay on time on a regular basis, which shows lenders you’re responsible for paying down your existing debt.

Pro tip: Opening new credit cards could affect your credit score, so make sure you find the best credit cards before opening one.

Bankruptcy is on your credit report forever

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Falling so deep into debt can be tough that you feel your only option is bankruptcy. You may be concerned about the short-term consequences and that it will live on your credit report forever.

But bankruptcy won’t stay on your credit report. It can be a tough decision and hurt you financially, but filing for bankruptcy is likely to come off of your credit report in seven to 10 years.

Only big debts go to collection agencies

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You may think it’s OK to have a $20 debt on a store credit card from years ago that you forgot to pay or just want to avoid.

But even small debt can be sent to a collection agency for processing, and that small amount of debt can also cause a hit on your credit score.

Instead, make sure you track down any debt you have, regardless of the amount, and get it paid off. An easy way to do this is to get a free copy of your credit report.

You also may want to consider finding new ways to pay off your debt so you don’t have to worry about it anymore.

It’s best to make the minimum payment

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You may notice your credit card statement has a minimum payment, and you might assume that it’s all you need to pay that month to keep yourself out of debt.

But you really should pay the entire balance each month so the debt doesn’t grow too high for you to pay off. Those charges collect interest at a rate set by the credit card company, which is higher than the typical rates for other debt.

Most debt is credit card debt

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You may think one of the reasons there’s so much debt in the U.S. is because Americans keep running up the tab on their credit cards.

But a whopping 70% of debt in this country is from mortgages. An additional 9% of debt each is due to student loans or car loans. Credit card debt actually ranks fourth with 6% of all debt for Americans.

All debt is bad

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Just because you have debt doesn’t mean that’s a bad thing. There is such a thing as good debt. 

Your mortgage, for example, could be good debt because you have a place to live while you’re paying the loan and a tangible asset when you’re done. And a student loan can allow you to get an education to increase your potential earnings power later on.

Checking your credit report will hurt your score

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Knowing how healthy your credit is is essential if you’re considering applying for a car loan or mortgage. 

You’re entitled to a free copy of your credit report from each of the credit bureaus — Equifax, Experian, and TransUnion — every year, which can help you keep tabs on your overall debt.

And checking your credit report will have no impact on your credit score. Many credit cards offer cardholders free credit scores, so take advantage of that perk.

Closing a credit card will boost your credit score

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You may be surprised to learn that closing credit cards could negatively impact your credit score. 

Any credit cards you close reduce the amount of available credit you have as well as the length of your credit history, causing your score to go down.

Instead, consider limiting yourself to only a few credit cards you use for a long time to build up your credit history. 

And think about rejecting any offers for in-store credit cards that could open up another line of credit that you may have to close later.

You have to declare bankruptcy if you can’t pay debt

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While bankruptcy won’t follow you forever, it can burden you financially and personally, especially in the short term.

So before you declare yourself bankrupt, consider other options, such as consolidating your debt into a personal loan with a lower interest rate. Consolidating your debt might get you better repayment terms than dealing with individual debts.

You have to take on your spouse’s debt

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There are some laws that could make you responsible for your spouse’s debt, such as co-signing a loan or adding your name to an existing loan.

But simply getting married doesn’t automatically mean you’re responsible for someone else’s debt. Make sure you consider different factors when deciding how to handle the debt a spouse may bring into a marriage.

Pay off all your debt now

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Clearing your balance sheet of any debt may bring you peace of mind. But you may be surprised to know that there’s some debt you could be better off holding.

Your mortgage, for example, may have a lower interest rate than your credit card debt, so you should prioritize paying off the higher-interest debts first.

Before you spend cash to pay off your mortgage, do some calculations to include any tax credits or deductions you may get by holding a mortgage.

The best car loan is from the dealer

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Buying a car can be expensive, and you may have to go into debt with a car loan to purchase it. But a car dealership may not be the best place to get financing.

Before you go car shopping, check with different financial institutions to see if you can get a better interest rate than you can with the dealership. If you’re going into debt with a major purchase like a car, make sure you at least get the best rate.

Bottom line

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Debt can be scary, but knowing the truth about debt and credit may help you manage it better.

If you’re worried about your debt, you may want to consider ways to earn extra money to pay off your debt and control your bills.

You should also consider creating a budget to help you handle your debt in relation to other everyday expenses. An accurate monthly budget may help you find ways to save extra cash to pay off your debt.

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Author Details

Jenny Cohen

Jenny Cohen is a freelance writer who has covered a bit of everything, from finance to sports to her favorite TV shows. Her work has been featured in The Wall Street Journal, USA Today, and FoxSports.com.