Financial essentials
6 debt myths
to avoid
Knowing how to separate fact from fiction can help you tackle your debt.
1. All debt is bad.
When used properly and managed well, taking on debt can be a way to help you achieve financial goals. Money borrowed to buy a home or go to college, for example, is typically considered good debt because these kinds of loans typically come with lower interest rates and positive tax benefits. However, debts you can't afford to pay and debts with high interest rates are both considered bad debt. Credit card balances are the most common type of bad debt, which can also include high-interest personal loans.
2. You should pay off all your debt as fast as you can.
If you want to become debt-free, make a plan and prioritize paying off bad debts over good debts. If you're holding low-interest debt that may have tax benefits, such as a mortgage or low-interest student loans, you may be better served by paying off a portion of those each month while still putting money toward an emergency fund or other financial priorities, such as investing for the future. Sacrificing saving for retirement in order to pay down low-interest debt may mean that you lose out on the potential for compound interest and have less money than you hope for in retirement.
3. All debt negatively impacts your credit score.
Taking on debt does not necessarily hurt your credit score. In fact, taking on some debt and managing it successfully helps you establish a positive credit score. Your score is determined by multiple factors, including the available, unused credit you have access to, your payment history and the length of time you have had accounts with lenders. Recent changes to how credit scores are calculated have reduced the impact that medical debt can have on your credit score.
You are entitled to a free credit report every 12 months from each of the three credit-reporting agencies, and checking your credit score and report does not lower your credit score.
4. Just paying the minimum payment on my credit cards is fine.
While it is important to pay at least the minimum payment every month, the less you pay on outstanding debts, the more you will eventually pay in interest, meaning it will take you longer to become debt-free. Minimum payments can often be nearly offset by the amount of interest you're charged, so you may find that you owe nearly the same total amount on your debt the following month.
5. Checking your credit score will hurt your credit score.
You are entitled to a free credit report every 12 months from each of the three credit-reporting agencies, and checking your credit score and report does not lower your credit score. Many financial providers also will provide you with your credit score at no cost to you.
6. When you get married, you're responsible for your spouse's debt.
While you are responsible for any debts taken out in joint accounts or if your name is added to an existing account, if two people keep their accounts separate when they get married, one spouse is not legally responsible for the other's existing debts. Similarly, if your spouse passes, unless you live in a community property state, you're generally not responsible for paying your spouse's debts unless you were a co-signer on a loan or joint account holder.
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This material is for informational or educational purposes only and is not fiduciary investment advice, or a securities, investment strategy, or insurance product recommendation. This material does not consider an individual’s own objectives or circumstances which should be the basis of any investment decision.