Common Myths About Debt That Can Cost You Money

This myth likely persists because people conflate using credit with carrying a balance. Credit bureaus reward utilization of credit — meaning you have an active account and use it — but they do not reward revolving unpaid debt. In fact, carrying a balance increases your credit utilization ratio, which can lower your score if it rises above roughly 30% of your available credit. More importantly, any balance you carry accrues interest, often at rates between 20% and 30% APR. You're paying the issuer for the privilege of a myth. Charge what you can pay off monthly, and you get the score benefit without the interest cost.

Debt is a financial instrument, not a moral failing. The key variables are interest rate and purpose. A fixed-rate mortgage at a relatively low interest rate, for example, allows you to build equity in an appreciating asset. Federal student loans at low interest rates can generate a return if the education meaningfully increases your earning power over time. The harmful debt — the kind worth eliminating aggressively — is high-interest consumer debt, particularly credit card balances and certain personal loans, where the cost of carrying the balance outpaces almost any competing financial benefit. Treating all debt identically leads people to overpay low-interest debt while neglecting high-interest debt or failing to save.

Credit card minimum payments are typically calculated as a small percentage of your balance or a flat fee — whichever is greater. On a $5,000 balance at 22% APR, paying only the minimum each month could mean more than a decade of payments and thousands of dollars in interest before the debt is retired. The debt doesn't vanish; it compounds. Our companion article Why Paying Minimum Balances Keeps You in Debt Longer Than You Think walks through the actual math in detail. The practical fix: pay as much above the minimum as your budget allows, consistently.

Two important scoring factors work against you when you close an old card: credit utilization and length of credit history. Closing a card reduces your total available credit, which raises your utilization ratio on remaining balances. It also removes that account's history from your active profile over time, shortening your average account age. Unless the card carries an annual fee that isn't justified by its benefits, most personal finance professionals recommend keeping old accounts open and occasionally making a small purchase to keep them active — rather than closing them in the name of simplicity. If you're evaluating how you use cards day-to-day, our article on debit vs. credit for everyday purchases covers the practical tradeoffs.

The either/or framing is one of the most paralyzing debt myths because it leads people to delay saving entirely until their debt is gone — which can take years. The problem: without even a small emergency fund (commonly suggested at $500–$1,000 to start), any unexpected expense forces you back onto high-interest credit, undoing progress. A practical middle path is to build a modest emergency fund first, then split additional funds between aggressive debt repayment and continued saving. Many personal finance frameworks, including variations of the 50/30/20 rule, allocate a portion of income to both goals simultaneously. Saving money while carrying debt offers a concrete starting framework.