Good Debt, Bad Debt, and Everything In Between

Debt gets a bad rap. And in some cases, that's fair. High-interest debt can be genuinely damaging to your financial health. But the belief that all debt is bad, period, leads people to make decisions that actually work against them. Let’s separate the fact from fear.
 

Myth #1: All Debt is Bad Debt

Not all debt is created equal. Some debt actually helps you build wealth, like a mortgage, which finances something that typically grows in value over time. That kind of debt can work for you in the long run. But debt used to pay for everyday purchases (and not paid off regularly), like carrying a credit card balance, is a different story. High interest rates can leave you paying exponentially more, and it’s worth taking a hard look at.

Moral of the story, instead of asking ‘do I have debt?’, ask yourself ‘what is my debt doing for me, and what is it costing me?’
 

Myth #2: Making Minimum Payments Keeps You on Track

Making a minimum payment keeps you current, avoiding late fees and credit damage. But, depending on the debt, they may not be a good payoff strategy. For example, making the minimum payment on your 4% auto loan may work just fine for you and the compounding interest is manageable. But on a $3,000 credit card balance at 20% APR, making only minimum payments could take well over a decade to pay off and cost you more in interest than the original balance.

The key to making your debt payment strategy is first understanding the structure and long-term costs of your debt.
 

Myth #3: Closing Old Accounts Improves Your Credit Score

While you may be tempted to close credit cards to avoid spending, it can actually lower your credit score. Your score is based on credit utilization, how much of your available credit you're using, and the length of your credit history. Closing an account reduces your available credit and can shorten your average account age. 

Keeping your account open and occasionally using it can be the smarter move. And if you’re worried about high annual fees, reach out to the card provider to see if you can transfer to a low- or fee-free card.
 

Myth #4: You Should Pay Off All Debt Before You Start Saving

While it may sound logical to get out of the hole before you start building, that’s not the case. By waiting until all debt is gone to begin saving, you may miss years of compound growth in a retirement account or find yourself without an emergency fund when something unexpected happens, possibly forcing you back into debt to cover it.

A balanced approach often works best. Build a small emergency fund first, then tackle high-interest debt aggressively, while still contributing enough to retirement accounts to cash in on any employer matches.
 

Myth #5: Debt Consolidation Always Saves Money

Consolidation is the act of combining multiple debts into a single loan, often at a lower interest rate. This can absolutely be a smart move, but it's not automatically a money-saver. If the new loan has a longer repayment term, you might pay less per month but more overall. And if the behavior that created the debt in the first place doesn't change, consolidation can become a temporary fix that leads back to the same problem.

Before consolidating, run the numbers. What’s the total interest paid over the full life of the new loan? Make sure the math genuinely works in your favor.
 

Smart Debt Management

Wondering what may be the best strategy for you? It all starts with an understanding of what you owe: the balance, the interest rate, and the minimum payment for each account. From there, two popular payoff strategies emerge:
 

• The Avalanche Method: Pay minimums on all accounts, then put any extra money toward the highest-interest debt first. Mathematically, this saves the most money over time.
• The Snowball Method: Pay minimums on all accounts, then attack the smallest balance first. It builds psychological momentum, small wins that keep you motivated.

Neither is universally better. The best strategy is the one you'll actually stick to.
 

Less Myths, More Progress

Carrying debt doesn't mean you're failing. In fact, it can be quite the opposite. What matters is having a plan. Understand what you owe, what it's costing you, and what steps you're taking to move in a better direction.
 
Looking for a little more support? We partnered with GreenPath Financial Wellness to help set you up for success. You can request a call with one of their certified financial counselors or take advantage of online resources on your own time.