Common Myths About Paying Off Debt That Can Set You Back

Treating all debt as equally harmful leads people to make suboptimal trade-offs, such as aggressively paying down a low-interest mortgage while carrying high-interest credit card balances. Financial educators commonly distinguish between debt that funds appreciating assets or builds human capital — such as a reasonably priced student loan or a mortgage — and high-cost consumer debt that carries little long-term benefit. The interest rate and the underlying purpose matter far more than the existence of debt itself.

Credit card minimum payments are typically calculated as a small percentage of the outstanding balance or a flat dollar amount, whichever is greater. Because interest accrues on the remaining balance each cycle, paying only the minimum extends repayment dramatically. On a $5,000 balance at 20% APR, making only minimum payments could take well over a decade to pay off and cost thousands in interest charges above the original principal. Even modest increases above the minimum can compress the timeline significantly.

Debt consolidation — combining multiple debts into a single loan or balance transfer — can be a useful tool when it lowers your effective interest rate. However, it works only if the terms are genuinely more favorable and if spending behavior changes. Consolidating and then accumulating new balances results in more total debt, not less. Additionally, some consolidation products extend the repayment period, which can lower monthly payments while increasing total interest paid. Our full explainer on debt consolidation covers these trade-offs in detail.

Credit utilization — the ratio of your outstanding balances to your total available credit — is a significant factor in most credit scoring models. When you close an account, that available credit disappears, which can push your utilization ratio higher even if your balances remain unchanged. Closing older accounts also reduces the average age of your credit history, another factor that scoring models weigh. Unless there is a compelling reason (such as an annual fee that outweighs the benefit), leaving paid-off accounts open and unused is generally the more credit-friendly choice.

This myth is understandable — the math of high-interest debt is punishing, and redirecting money toward savings rather than repayment can feel counterproductive. But an emergency fund, even a small one, acts as a financial circuit breaker. Without it, an unexpected expense typically lands back on a credit card, restarting the cycle. A parallel approach — maintaining a small reserve while making above-minimum payments — is generally more sustainable than an all-or-nothing strategy. Budgeting myths that keep people from starting explores related misconceptions that make it harder to build this kind of structure.