Money Myths That Are Keeping You in Debt
- Getting out of credit card debt is a slow process if you’re only paying the minimum.
- Zero-interest offers seem like a smart way to finance big purchases, but they could encourage overspending.
- You could get into financial trouble if you use a credit card as your emergency fund.
Table of Contents
Many of us learn as we go when it comes to money. You might pick up the basics from family and friends. If you’re lucky, you get a decent financial education growing up. Once you’re in the adult world, you’re on your own.
Because of the way people learn about money, there are lots of myths out there. Some of these money myths can lead to costly issues, such as keeping you in debt for longer than necessary.
You Only Need to Pay the Minimum on Your Credit Cards
Technically, this is true. Credit card companies only require that you make the minimum payment every month. But while minimums payments will keep your account in good standing, you probably won’t make much progress on your debt.
Minimum payments are normally either a small portion of your balance or a fixed dollar amount, whichever’s more. For example, a card issuer may set a minimum of either 3% or $25. On a $2,000 balance, your minimum payment would be just $60. And if you only made minimum payments, it would take you nearly 13 years to get out of debt. In that time, you’d pay $2,111 in interest.
Always try to pay more than the minimum on your credit cards. The more you pay, the faster you could get free of debt. If your balances are so high that you can only pay the minimums, you may want to consider a debt relief program to take control of your situation.
You Shouldn’t Close Old Credit Cards
A popular piece of advice is to keep old credit cards open. Because of how your credit score is determined, older accounts generally have a positive impact.
But those accounts don’t just disappear from your credit history if you close them. If you close an account in good standing (meaning you made the payments on time and paid it off in full), then it stays on your credit report for up to 10 years. During that time, the account can still help your credit score. You don’t need to keep accounts open to preserve your credit.
It’s also important to consider whether your credit cards affect your financial habits. If credit cards tempt you into spending more or going into debt, then you’re likely better off closing them, even if it dings your credit a bit.
Zero-Interest Offers Are the Best Way to Pay for Big Purchases
Zero-interest offers are common nowadays. Some stores offer promotional financing plans, and there’s also buy now, pay later (BNPL) and 0% intro APR credit cards. These offers let you pay off big purchases over multiple payments and multiple weeks/months, but they’re riskier than many people realize.
For starters, some financing plans have deferred interest. You pay zero interest only if you pay off the full balance within the promotional period. If there’s even $1 left over, you could be charged interest going back to when you first made the purchase.
Zero-interest offers might also encourage overspending. It’s easy to get into the habit of signing up for payment plans so you can afford a new phone, furniture, clothes, and so on. Even at zero interest, you’re still taking on debt, and those monthly payments add up. Financing purchases isn’t always a bad idea, but as a general rule, it’s better to save beforehand and pay for expenses in full upfront.
You Can Use a Credit Card as Your Emergency Fund
Nearly a quarter of Americans have no emergency savings, according to a Bankrate survey. Some simply haven’t been able to save. Others choose not to save for emergencies, believing that they can rely on their credit cards in a pinch.
That’s a serious mistake, because credit cards aren’t a good substitute for an emergency fund. Most credit cards have high interest rates, with the average being about 21%, based on Federal Reserve data. Every month you carry a balance, interest charges make your emergency even more expensive.
Not all expenses are payable by credit card, either. Imagine the emergency is that you lose your job and suddenly have no income. You might not be able to pay your rent or mortgage with a credit card, putting you in a dangerous situation. With an emergency fund in a savings account, you could keep paying your living expenses.
Refinancing Solves Your Debt Problem
People sometimes think that they’re just one balance transfer card or debt consolidation loan away from getting debt under control. These are both tools that could help with your debt, but they don’t fix the problem for you.
The only way to do that for good is to address whatever caused your debt in the first place. If you regularly spend more than you can afford on credit cards, you’re not going to solve that by opening a new balance transfer card. You’d just be moving your debt from your original cards to your new one. A balance transfer can even make your problem worse, if you start overspending on your old credit cards again.
By pinpointing the cause of your debt first, you can figure out how to fix it and hopefully prevent it in the future. There’s nothing wrong with using a loan or a balance transfer card to refinance your debt, as long as you look at it as a tool and not a cure-all.
All of these money myths are fairly common. And they can all cost you money by getting you into debt or making it harder to get out of debt. Now that you know about them, you can avoid any costly financial traps.
Author Information
Written by
Lyle Daly
Lyle is a financial writer for Freedom Debt Relief. He also covers investing research and analysis for The Motley Fool and has contributed to Evergreen Wealth and Monarch Money.
Reviewed by
Kimberly Rotter
Kimberly Rotter is a financial counselor and consumer credit expert who helps people with average or low incomes discover how to create wealth and opportunities. She’s a veteran writer and editor who has spent more than 30 years creating thousands of hours of educational content in every possible format.
Is it good to carry a credit card balance?
No, it’s generally not good to carry a credit card balance from month to month. When you carry a balance past your due date, the card issuer can charge you interest—and most credit cards have very high interest rates. There’s a myth that carrying a small credit card balance helps your credit score, but it isn’t true. Carrying a small balance doesn’t help your credit.
Will my credit score drop if I close an old credit card?
Your credit score may drop if you close an old credit card. When you close a card, you lose its credit limit. Having less total credit could increase your credit utilization if you’re carrying balances on your other credit cards. The impact on your credit score will depend on the rest of your credit file.
Is $20,000 in debt a lot?
It depends on the type of debt and your financial situation. For most people, $20,000 would be a large amount of credit card debt and a possible financial emergency. On other types of debt, such as student loans and auto loans, $20,000 is a fairly typical amount to owe.