8 common debt myths debunked

Few of us have finance degrees or formal financial education, and it can be easy for myths about debt to sneak into our heads. We probably don’t even remember how we got these mistaken ideas (but it might start with “tik” and end with “tok”). 

Anyway, once you demystify debt, you can get a lot more comfortable in dealing with it—and make your life a bit easier. 

Myth 1: All debt is bad

False. Not all debt is bad. 

In fact, personal finance pros group debt into “bad” and “good” types. Yes, there’s such a thing as good debt. 

How do you know if debt is good or bad? It depends on ‌whether you can afford the payments and how you spend the money. Financing an investment like a house or borrowing for education that increases your earning potential is usually good. Bad debt, on the other hand, leaves you with nothing but payments. Impulse purchases that you don’t need fall into this category. 

Myth 2: Paying off a debt removes it from your credit report

Not true. Paid off debt stays on your credit report (and factors into your credit score) for 7-10 more years. 

If you have a credit card account with numerous late or missing payments, or a collection agency is after you for defaulting on your car loan, paying it off won’t generally wipe it from your credit report or your credit score. Late payments and collections can stay on your credit report for seven years after the date of delinquency.

On the flip side, closing an account in good standing leaves you with the benefit of your positive payment history and good debt management for ten more years.

However, there are exceptions. Paying off medical collections does remove them from your credit reports. And sometimes you might be able to negotiate a “pay for delete” agreement with a creditor, which means you pay the debt and in return they agree to remove the ding from your credit report. Make sure that you get such agreements in writing before you pay.

Myth 3: Budgeting to pay off debt takes the fun out of life

Nope. Your budget represents your priorities. If fun is important to you, budget for it. 

Many people hesitate to create a budget because they think it will restrict them to boring, necessary purchases only. That’s not usually true. The purpose of a budget is to help you find more money for what matters to you.

You might really want to live in a certain neighborhood, for instance. And you can afford living there—if you buy a cheaper car and cut your restaurant spending in half. On the other hand, you might want to travel frequently and eat out often. In that case, get a few roommates to reduce your housing costs and hit the road. 

Myth 4: It’s smart to pay the minimum on your credit card

In fact, minimum payments make the debt last longer and cost more. 

Credit card companies make it really easy to pay the minimum each month. There’s that simple little checkbox on your statement. And the minimum is often the first option shown on online billpay. Paying the minimum is exactly what credit card companies want you to do.

The truth is, paying the minimum is practically guaranteed to maximize your borrowing cost—and your credit card issuer’s profit. It can also make it easier to take on too much debt. The smartest way to pay your credit card bill is in full every month, so you can take advantage of rewards without being charged interest. If you’re already carrying a balance, pay as much as you can and charge as little as possible until it’s paid.

Myth 5: Debt resolution ruins your credit forever

Debt resolution means working out an agreement with your creditors to pay less than the full amount you owe. Resolving debts is more favorable to your credit standing than having collection accounts. 

Debt resolution could impact your credit standing. Your credit could take a hit as you or a debt resolution company negotiates your debt if you’re missing payments in the meantime. 

Resolving debts could help you manage your bills going forward. Paying your bills on time and keeping your debt low could put you in a great position to build strong credit.  

Myth 6: Divorce automatically separates you from your ex-spouse’s debt

Not so. Your responsibility for your ex’s debt depends on whose name is on the agreement and where you live.

Even if a judge makes one former partner solely responsible for the existing balance on a joint account, you are legally responsible for it if your name is on it. That’s because when you borrow, the agreement is between you and a lender. If you and your former spouse made an agreement with a lender, you have a joint debt. You’re both obligated to repay it, and your creditor can sue either one of you for nonpayment. 

Also, in a community property state, your creditor may sue you for the debt even if your name isn’t on it. 

You can avoid these problems by paying off joint debt as part of your divorce or before filing. Partners can sell assets and pay off their accounts. You can also refinance a debt in one name only, to remove the former partner from the account. 

This information is intended for general informational purposes only and should not be construed as legal advice. For personalized legal advice, consult with a qualified attorney licensed to practice law in your state.

Myth 7: Credit repair services can fix your credit score

Credit repair services can’t permanently remove accurate information from your credit file. 

In addition, there’s nothing they can do about the information in your credit file that you can’t do yourself for free. 

Some services might claim they can help you apply for a “credit privacy” number, or CPN, for you to use instead of your Social Security number. But CPNs are often just stolen Social Security numbers. Creating or using one could get you in trouble for fraud. In fact, CPNs aren’t authorized by the federal government, and no entity has the authority to issue these numbers.

Myth 8: You can settle a debt for pennies on the dollar

This one isn’t necessarily false. Sometimes people do, in fact, negotiate with their creditors to accept significantly less than the amount owed. This might work for very old debts that were written off and sold to debt buyers for very little. The debts may also be uncollectible because too much time has passed and the creditor can no longer sue.

However, no debt resolution company can legally make this promise—because creditors aren’t required to negotiate debt. A debt resolution professional may have a good track record, and may be experienced and proficient with this type of negotiation. But debt resolution professionals can’t legitimately guarantee a specific outcome. A reputable debt resolution company will never promise that they can get you a specific amount of debt forgiveness.