Couple using laptop and reviewing debt. Debunking debt myths

Debt Basics

8 common debt myths debunked

Sep 12, 2024

glp head shot 23.jpg

Written by

Jill-Cornfield.jpg

Reviewed by

Key takeaways:

  • Debt myths are common beliefs about money that are not true or only partly true.

  • Believing debt myths could cost you money. 

  • Acting on true knowledge about debt could help you build financial security.

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, whether that means debt resolution with existing debt, or avoiding debt when you can—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. 

Consider using a budgeting app.

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 could help you work 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.

Author Information

glp head shot 23.jpg

Written by

Gina Freeman has been covering personal finance topics for over 20 years. She loves helping consumers understand tough topics and make confident decisions. Her professional history includes mortgage lending, credit scoring, taxes, and bankruptcy. Gina has a BS in financial management from the University of Nevada.

Jill-Cornfield.jpg

Reviewed by

Jill is a personal finance editor at Achieve. For more than 10 years, she has been writing and editing helpful content on everything that touches a person’s finances, from Medicare to retirement plan rollovers to creating a spending budget.

Related Articles

financial-stress.jpg

Debt Basics

Debt stress can affect your physical and mental health. Learn what you can do now to stop it in its tracks.

what-does-it-mean-to-be-insolvent.jpg

Debt Basics

You may be insolvent if you don’t have enough money to pay your debts. Insolvency could allow you to settle debt tax-free or wipe it out in bankruptcy.

good-debt-bad-debt.jpg

Debt Basics

Good debt helps you reach your goals at a cost that’s fair. Learn more about how to judge a debt for yourself.

Achieve Logomark

Achieve is the leader in digital personal finance, built to help everyday people move forward on the path to a better financial future.

Footer Trust Pilot Marker

TrustScore 4.8/5

Footer BBB Marker

.

Personal loans are available through our affiliate Achieve Personal Loans (NMLS ID #227977), originated by Cross River Bank, a New Jersey State Chartered Commercial Bank and may not be available in all states. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, credit usage and history. Loans are not available to residents of all states. Minimum loan amounts vary due to state specific legal restrictions. Loan amounts generally range from $5,000 to $50,000, vary by state and are offered based on meeting underwriting conditions and loan purpose. APRs range from 8.99 to 35.99% and include applicable origination fees that vary from 1.99% to 6.99%. The origination fee is deducted from the loan proceeds. Repayment periods range from 24 to 60 months. Example loan: four-year $20,000 loan with an origination fee of 6.99%, a rate of 15.49% and corresponding APR of 19.54%, would have an estimated monthly payment of $561.60 and a total cost of $26,956.80. To qualify for a 8.99% APR loan, a borrower will need excellent credit, a loan amount less than $12,000.00, and a term of 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to pay off qualifying existing debt directly; or showing proof of sufficient retirement savings, could help you also qualify for lower rates. Funding time periods are estimates and can vary for each loan request. Same day decisions assume a completed application with all required supporting documentation submitted early enough on a day that our offices are open. Achieve Personal Loans hours are Monday-Friday 6am-8pm MST, and Saturday-Sunday 7am-4pm MST.

Home Equity loans are available through our affiliate Achieve Loans (NMLS ID #1810501), Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Home loans are a line of credit. Loans are not available to residents of all states and available loan terms/fees may vary by state where offered. Line amounts are between 15,000 and $150,000 and are assigned based on debt to income and loan to value. Example: average HELOC is $57,150 with an APR of 12.75% and estimated monthly payment of $951 for a 15-year loan. Minimum 640 credit score applies to debt consolidation requests, minimum 670 applies to cash out requests. Other conditions apply. Fixed rate APRs range from 8.75% - 15.00% and are assigned based on credit worthiness, combined loan to value, lien position and automatic payment enrollment (autopay enrollment is not a condition of loan approval). 10 and 15 year terms available. Both terms have a 5 year draw period. Payments are fully amortized during each period and determined on the outstanding principal balance each month. Closing fees range from $750 to $6,685, depending on line amount and state law requirements and generally include origination (2.5% of line amount minus fees) and underwriting ($725) fees if allowed by law. Property must be owner-occupied and combined loan to value may not exceed 80%, including the new loan request. Property insurance is required as a condition of the loan and flood insurance may be required if the subject property is located in a flood zone. You must pledge your home as collateral and could lose your home if you fail to repay. Contact Achieve Loans for further details.

Affiliated Business Arrangement Disclosure: Achieve.com (NMLS #138464) and Achieve Loans are both wholly owned subsidiaries of Achieve Company. Because of this relationship, your referral to Achieve Loans may provide Achieve.com a financial or other benefit. Where permitted by applicable state law, Achieve Loans charges: 1) an origination fee of 2.50%, and 2) an underwriting fee of $725. You are NOT required to use Achieve Loans for a home equity line of credit. Please click here for the full Affiliated Business Arrangement disclosure form.

Resolution is available through our affiliate Achieve Resolution (NMLS ID # 1248929). All estimates for Achieve Resolution’s services are based on prior results, which will vary depending on your specific enrolled creditors and your individual program terms. Not all Achieve Resolution clients are able to complete their program for various reasons, including their ability to save sufficient funds. Achieve Resolution does not guarantee that your debts will be resolved for a specific amount or percentage or within a specific period of time. Achieve Resolution does not assume your debts, make monthly payments to creditors or provide tax, bankruptcy, accounting or legal advice or credit repair services. Achieve Resolution’s services are not available in all states, including New Jersey, and their fees may vary from state to state. Please contact a tax professional to discuss potential tax consequences of less than full balance debt resolution. Read and understand all program materials prior to enrollment. The use of Achieve Resolution services will likely adversely affect your creditworthiness, may result in you being subject to collections or being sued by creditors or collectors and may increase the outstanding balances of your enrolled accounts due to the accrual of fees and interest. However, negotiated settlements Achieve Resolution obtained on your behalf resolve the entire account, including all accrued fees and interest. C.P.D. Reg. No. T.S.12-03825.

© 2024 Achieve.com. All rights reserved. NMLS #138464