14 Myths About Debt Americans Need to Stop Believing

Americans are no strangers to debt, with the average individual owing $21,800 in non-mortgage debt in 2023. Nevertheless, you can bet your bottom dollar that some debt-carrying Americans believe these myths about debt.

Mindfully American dug into research and read people’s opinions on the concepts they hold true about debt. The result is this list of debt myths people need to stop believing.

Some of the points on this list are relatively harmless. Others could be standing in the way of keeping more money in your pocket.

1: Debt Hurts Credit Scores

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It sounds counterintuitive, but credit reporting agency Equifax confirms it: After paying off debt, your credit score might lower, not increase.

So, why does this happen? Credit reporting agencies like to see what they call a credit mix. Having a combination of loans, credit cards, and mortgages can all help your credit score, provided you pay your bills on time. Furthermore, a high credit utilization ratio can lower credit scores. By paying off, say, a credit card and canceling it altogether, you might inadvertently increase your credit utilization ratio, pulling down your credit score.

Of course, paying down debt is almost always a good thing. So, as long as you aren’t planning on taking out a mortgage or getting a car loan in the near future, there’s little reason not to pay off your debt in the name of your credit score potentially lowering.

2: Minimum Credit Card Payments Are Good

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Many Americans falsely believe that if they can afford the minimum payment on an item, they can afford the purchase altogether. Not so.

Making minimum monthly payments on credit cards is better than missing payments. However, by paying the minimum amount due, you significantly prolong the amount of time it’ll take to pay off your credit card as interest accumulates.

In a CNBC example, if a person has a $827.32 credit card balance, a variable interest rate of 15.99%, and only makes the minimum $25 payment, it’ll take around four years to pay off their credit card while accumulating $285.68 in interest charges. On the other hand, if they increase their minimum payment by just $4 so that they put $29 per month towards their credit card payment, they’ll save around $57 and have their card paid off in around three years.

Imagine how much money this same person would save if they contributed even more money each month toward their credit card debt.

3: Debt Is Always Bad

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We’ve already established that when managed properly, debt can be good for credit scores, although it isn’t always wise to take out debt in the name of maintaining a high credit score.

However, financially savvy individuals can be very wise to take out debt to help them build wealth. Capital One lists a number of situations where debt can be good when used responsibly. For example, taking out a mortgage can help a person increase their net worth, and the interest one pays might be tax-deductible. Furthermore, taking out student loans to get a diploma, leading to a high-paying career in an in-demand field, is also a situation when debt can be viewed as a good thing.

Business owners may also take out debt to increase their revenue. Doing so comes with risks, though, so doing due diligence on the probability of increasing business income is vital.

4: Credit Repair Services Are Guaranteed

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Credit repair companies act on behalf of a client with the goal of helping them improve their credit score. They have a place in the credit world, but many Americans misunderstand how they work.

Here’s the truth: Credit repair services don’t do anything that you can’t do, and there’s no guarantee they can improve your credit score. They do, however, save a client time, which might be worth it for people who work nearly every waking hour of their day to try to pay off their debt.

If you want to skip the frequently high fees that go into paying for a credit repair service, contact the credit bureaus yourself to dispute any inaccurate information you see on your credit report.

5: Checking Credit Scores Is Bad

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There are understandable misconceptions about the idea that checking one’s credit score will lower their overall score. However, this isn’t true.

There are two types of credit card inquiries: soft credit checks and hard credit checks. Soft credit checks are the kind that a credit card holder does when wanting to keep tabs on their credit cards. In contrast, lenders run hard credit checks, which temporarily lower credit scores.

If you don’t believe us, check what consumer credit reporting company Experian says. They state that it’s a good idea to check your credit score frequently, and you can do so as many times as you want without having to worry about it negatively impacting your credit score.

6: Bankruptcy Is a Viable Option

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At face value, yes, bankruptcy is an option for many Americans. But just because it’s an option doesn’t mean you should do it.

Bankruptcy will show up on your credit report for as long as ten years. That means it can be more challenging to get a mortgage, car loan, and other debt. If you’re able to take out a loan, you’ll likely be offered it with a high interest rate.

Filing for bankruptcy also comes with fees. You’ll have to pay a fee to file, plus pay an attorney to represent you through the process. Attorney fees alone start anywhere from $1,300 to $3,000, depending on whether you file Chapter 7 or Chapter 13 bankruptcy.

7: One Credit Score Gives the Full Picture

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Many Americans believe that when they check their credit score, they know for certain what it is. So, it can be either a pleasant experience or a rude awakening to learn from your lender that your credit score is different from what you’ve seen.

This is a common scenario driven by the fact that credit reporting agencies calculate credit reports in slightly different ways. Furthermore, lenders and creditors sometimes use different formulas to determine your credit score. To make things even more complicated, they’ll sometimes weigh different credit factors differently depending on the type of credit you’re applying for.

The good news? A difference in credit scores among these companies doesn’t mean anything is wrong. It’s a normal part of the lending process.

8: Newlyweds Take on Spouse’s Debt

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Thirty-seven percent of divorcees cite financial problems as their primary reason for untying the knot. Perhaps if the person had known that they probably weren’t responsible for paying their partner’s debt, things would have gone a little smoother.

According to Experian, most states honor common law, which means that married couples don’t legally share personal property unless otherwise indicated.

So, provided that you didn’t take out debt with your partner under a joint account or were the cosigner on a loan, you’re likely not responsible for their debt.

9: A Late Payment Is Detrimental To Credit

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To be clear, making a late payment isn’t good and should be avoided at all costs. However, making a single late payment before 30 days is up after you missed the due date isn’t an end-all situation for your credit score.

In most cases, a late payment won’t appear on your credit report for 30 days or more after the payment’s due date. If you end up making your payment in less than 30 days, it’s possible that credit reports won’t even show a late payment.

Of course, just because a late payment doesn’t show up on your credit report doesn’t mean there aren’t other consequences; your lender will likely hit you with late fees.

10: Paying Debt Back Fast Is Always Best

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This is understandably a hard one for many Americans to wrap their heads around: Sometimes it’s financially better to pay off debt slower.

A situation when it’s better to make minimum payments on debt rather than paying it off as fast as possible is if you have low-interest debt and the option to invest your money into a higher-interest account.

For example, if you have a mortgage with a 4.5% interest rate, it likely makes more sense to invest your extra money into a 401(k) or other investment account, as these accounts have the potential to historically average around an 8% return, depending on how you invest your money.

So, you could actually be losing money in a situation like this if you focus on paying off your debt fast.

11: Debt Advice Comes at a Cost

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There can be value in paying an experienced financial advisor to help you design a debt management plan. However, paying for debt advice isn’t the only option.

For example, the Consumer Credit Counseling Service (CCCS) is a nonprofit organization offering free debt-management plans. You can take their virtual classes and webinars at no charge, and they offer financial calculators to help you get your debt paid off.

Similarly, you may be able to sign up for free debt education courses through your bank or credit union.

12: Becoming Debt-Free Instantly Mends a Credit Report

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Becoming debt-free is a reason to celebrate. However, don’t check your credit report the next day expecting your credit score to have skyrocketed.

According to Equifax, it takes between 30 and 45 days for the three main credit report agencies in the U.S. to receive new information from creditors about your debt-free situation. So, it’s reasonable to expect waiting a month or more to see a change on your credit report.

Just remember to brace for the possibility of your credit score decreasing rather than increasing, as discussed previously.

13: Joint Loan Confusions

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As frustrating as it can be if a relationship turns sour with a partner or loved one, the joint loan you signed with them doesn’t mean you’re only responsible for paying half.

Instead, if you’re the cosigner of a loan and your partner fails to pay their part, you’re responsible for covering the loan in its entirety.

Let this be a lesson to us all to tread carefully when choosing who to sign joint loans with, if at all.

14: Debt Collectors Can Contact You Around the Clock

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Debt collectors are notorious for being relentless in contacting people who owe debt. Nevertheless, by law, they can’t contact you at any hour.

According to the Fair Debt Collection Practices Act (FDCPA), which was signed into law in 1978, debt collectors can’t contact consumers at “unreasonable times.” Such times are generally considered between the hours of 9:00 pm and 8:00 am. Furthermore, the debt collector can’t contact a consumer at inconvenient places, including at one’s place of employment if the debt collector believes the employer prohibits it.

The FDCPA has a long document indicating when consumers are and aren’t covered under the law. It’s a good idea to review it if debt collectors frequently contact you.

Some Good News

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Despite many Americans struggling with debt, personal debt is decreasing in the United States. In 2019, the average American held $29,800 of non-mortgage debt, which is about $8,000 more than the average individual debt in 2023.

Furthermore, 43% of Americans in a Northwestern Mutual and Harris Poll study reported that they had the lowest or nearly the lowest debt they’ve ever carried in their lives.

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