How To Stay in Debt: The 11 Worst Pieces of Advice You’ve Probably Been Told

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In a world where sound financial advice is crucial for maintaining a healthy credit score and staying out of debt, it’s equally important to recognize and avoid misguided suggestions.

Based on insights from Experian and CNBC Select, here are some of the worst pieces of financial advice that could keep you entrenched in debt (or at least seriously harm your credit score).

• Use your credit card sparingly: Contrary to this common advice, using your credit card responsibly is key to building a good credit score. According to Experian, your FICO® Score, used by 90% of top lenders, is influenced by factors like payment history (35%), amounts owed (30%), and credit history length (15%). Regular use of a credit card, followed by full payment of the balance, can enhance your credit score and demonstrate your credit management skills.
• Close your credit card after paying it off: Many believe that closing a credit card after paying off the balance boosts your credit score. However, per Experian, this action can actually harm your score by reducing your available credit limit and increasing your credit utilization rate. A lower credit utilization rate, ideally below 30%, is better for your credit scores.
• All debt is bad debt: This is a misconception. Not all debt is detrimental to your financial health. Experian highlights that certain debts, like mortgages, auto loans, student loans, and business loans, can be beneficial. These debts can lead to long-term financial gains, provided they are managed responsibly and the monthly payments are comfortably affordable.
• Carrying a credit card balance improves your credit score: This advice is misleading. Carrying a balance does not directly improve your credit score and can result in unnecessary interest payments. Experian advises using credit cards regularly but paying off the balance each month to improve your credit score.
• Wait until you’re debt-free to start investing: According to Experian, waiting to be debt-free before investing might not be the best strategy. If the potential returns from investments outweigh the interest paid on debts, especially low-interest debts like student loans, investing could be a wise decision. Additionally, employer-matched retirement contributions are akin to free money and should be taken advantage of.
• Refinance your house to pay credit card debt: CNBC Select quoted Leslie Tayne, a debt-relief attorney, as warning against refinancing your home to pay off credit card debt. This converts unsecured debt into secured debt, putting your home at risk if you default on the mortgage.
• Use balance transfers as a means to pay off debt: Balance transfer credit cards can be beneficial, but they require careful consideration. Tayne emphasized the importance of understanding the terms, including credit limits, interest rates post-introductory period, and balance transfer fees. Misusing balance transfers can worsen your debt situation.
• Borrow from your 401(k) to pay down debt: Withdrawing from your 401(k) for debt payment can significantly set back your retirement savings. Tayne advised against this, as it leads to a loss of earnings and potential tax implications.
• Minimum payments are sufficient for great credit: Paying only the minimum on your credit card can lead to high interest charges and increased debt due to compound interest. Tayne recommended creating a budget that allows for full balance payments each month.
• Damaged credit scores cannot be rebuilt: This is a myth. Tayne indicated that credit scores can improve over time with responsible financial behavior, such as timely bill payments and maintaining a low credit utilization rate.
• Debit cards can build credit: This is incorrect. Tayne clarified that debit card usage does not influence your credit score, as it doesn’t get reported to credit bureaus. For building (or rebuilding) credit, secured credit cards are a more effective option.

In summary, staying informed and critically evaluating financial advice is crucial. Misguided suggestions, like those debunked by Experian and CNBC Select, can lead to prolonged debt and hinder your financial progress.

Further, it’s always advisable to conduct thorough research and consult financial experts when making significant financial decisions.

Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.

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