Common Myths About Debt That Keep People Stuck

This blanket belief causes some people to avoid mortgages, student loans, or small business financing that could meaningfully improve their long-term financial position. A fixed-rate mortgage, for example, can build equity over time while providing stable housing costs. The distinction lies in whether the borrowing supports an asset or goal whose value exceeds the total cost of the loan — and whether the monthly payment is genuinely affordable. High-interest consumer debt with no underlying asset, by contrast, warrants much more caution.

When you pay off a revolving account like a credit card, your credit utilization ratio (the share of available credit you're using) typically drops, which can improve your score. However, closing that account eliminates its credit limit from your available credit, potentially pushing utilization back up. Installment loans like car loans or student loans are scored differently: paying one off removes it from your active credit mix, which can cause a small, temporary score dip. In the long run, eliminating debt is almost always the right move — but understanding the mechanics helps set realistic expectations. For more on credit score mechanics, see our article on widespread credit score myths.

This myth is surprisingly persistent, and it is costly. Credit scoring models reward on-time payments and low utilization — neither of which requires an unpaid balance. Carrying a balance month to month means paying interest, sometimes at annual percentage rates (APRs) exceeding 20%, with no credit score benefit to show for it. Paying in full is almost always the financially superior approach. As detailed in our piece on credit myths that cost Americans money, this misunderstanding has real dollar consequences for millions of cardholders.

Under the Fair Credit Reporting Act (FCRA), most negative entries — including late payments and collections — must be removed from your credit report after seven years. However, the statute of limitations on collecting a debt is a separate, state-governed rule that varies widely. In some states, creditors can legally sue to collect a debt for longer than seven years, and in certain circumstances, making even a small payment can restart that clock. If you have old debts, consulting a nonprofit credit counselor or consumer law attorney before making any payment or acknowledgment is advisable.

Minimum payment formulas are typically set by the card issuer at a low percentage of the outstanding balance — often 1–2% plus interest. On a $5,000 balance at 20% APR, paying only the minimum each month can result in more than a decade of repayment and thousands of dollars in interest charges. On-time payments matter enormously for your credit history, but the amount you pay above the minimum is equally important for your total cost of borrowing. Paying more than the minimum — even modestly — can cut both time and interest significantly.