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Most people have been taught that certain kinds of debt are “good,” and that others are “bad.” But debt doesn’t always fit into neat categories. Take a look at some misconceptions about good debt vs. bad debt, and use the facts to get a better handle on your finances. You can consider this your personal debt payoff planner.

Good debt misconceptions

Myth: Putting a 20% down payment on a mortgage is always a wise move.

Fact: Buying a house can be a good investment, especially if the value of your home outpaces inflation. But while there are advantages to putting 20% down on a mortgage, saving that much dough isn’t always easy. Putting less down allows you to tackle important short-term goals like paying off student loan debt, and make headway on long-term goals such as saving for retirement. Consider this: In 2019, the median down payment for a home was 12% , according to the National Association of REALTORS®. (And with SoFi, qualifying borrowers may qualify for a mortgage with as little as 5% down.)

Tip: Get your mortgage rate in just two minutes. If you already have a mortgage, refinance for a lower rate. You might be surprised how much you can save. Currently, mortgage interest rates are at historically low levels. The average interest rate for a 30-year fixed rate mortgage was 3.230% in March 2020. Refinancing could allow qualifying borrowers to secure a lower interest rate on their mortgage.

Myth: High-interest student loans are a fact of life.

Fact: Yes, student loans allow you to get the education you need to secure the career you want, but that doesn’t mean you have to stick with the terms you were initially given. After you graduate, you can refinance your student loan to secure a lower interest rate and save money over the life of the loan.

Note that relief bills for the COVID-19 pandemic have extended borrower protections like the suspension of federal student loan payments and 0% interest rates through Sept. 2021 . Refinancing federal loans would eliminate them from these protections.

Myth: Student loans take at least 10 to 20 years to pay off.

Fact: With a little discipline, it’s possible to pay off student loans before you’re old and gray. Borrowers have the option to pay more than the minimum due. It’s amazing how quickly an extra $50 or $100 toward the principal adds up!

Another way to prepay student loans (or pay more than the minimum) is to schedule bi-weekly payments instead of monthly. By making one extra month of payments each year, you’ll chip away at your student loan that much quicker.

If you’re planning on making over-payments, double check with your loan servicer to be sure that payments are being directed to the principal value of the loan.

Bad debt misconceptions

Myth: Credit cards are nothing but trouble.

Fact: Credit cards aren’t inherently good or bad; it’s how you use them that determines their harm or value. Using credit for purchases that you pay off in full each month is smart because that diligence boosts your credit score. (On the flip side, never carrying a credit card balance means no payment history or late payments, which may hurt your score.) Plus, plenty of credit cards offer rewards, such as discounted travel, purchase and fraud protection, and cash back on purchases.

Recommended: 4 Simple Money Principles to Financial Fitness in Under 4 Minutes

Looking for the optimum amount to charge? Here’s a good rule of thumb: Keep the debt ratio below 30% of the credit limit. So, for example, if the limit on your credit card is $10,000, make it a habit to charge less than $3,000 each month. And pay off that full amount each month as well.

But those who are struggling to make the monthly payments or are in credit card debt, there are options to get that under control. One route to consider is consolidating credit card debt with a personal loan that offers a lower interest rate and a fixed monthly payment to pay off that credit card debt.

Myth: Getting a personal loan for a home renovation is a bad idea.

Fact: A personal loan could be your best friend when you need funds for home renovation and decoration. Contrary to what you might have heard, getting a personal loan for this purpose could be a tool that potentially improves its resale value.

For homeowners who have built up significant equity in their home and are planning a major renovation, a home equity loan is another financing option. If you owe $200,000 on a home valued at $500,000, for instance, you can apply for a home equity loan of $300,000. But for newer homeowners with little equity in their home, or those interested in smaller projects like a one-room remodel, a personal loan could be an option to consider.

Either way, it’s best to avoid spending more than is affordable or within budget. Keeping a home renovation on budget and working with professionals who will help you develop a plan of action and advise you on costs can be a smart move, depending on the scale of the renovation you are working on.

Myth: Auto loans are a waste of money.

Fact: Not necessarily. Only you can determine which expenses make sense for your budget and lifestyle. In 2020, the average monthly payment for a new car loan was $576 and the average loan term was 69 months. That’s not exactly spare change. There are ways to keep costs down, however.

If you buy an electric car, you’ll save money on gas ($800 to $1,000 annually ) and say goodbye to oil changes forever. And don’t forget to factor in the tax credit from the federal government (up to $7,500 ) and possibly even your state.

The Takeaway

Today, debt is more personal than the good debt vs. bad debt debate would have you believe. Rather than trying to classify your debt, consider the interest rates of each loan. Maybe you scored an auto loan with a low interest rate, but got stuck with a mortgage with a sky-high one. Securing a lower interest rate is a key part of any debt payoff plan, helping you transform “bad” debt to “good.”

Also, consider the value that things like education, a home, and travel add to your life. Education can open doors to a more lucrative and fulfilling career, your home can be an investment, and travel can provide the joy of exploring new corners of the world. Spend time thinking about your situation and determining your specific financial, career, and relationship goals. Then, based on those goals, develop a debt payoff plan that makes the most sense for you.

To learn more about managing your debt, contact a SoFi financial planner. In the meantime, share this article with someone you know who is struggling with debt—good, bad, or anything in between.

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