What Does It Mean to Be Debt-Free?

Having no debt can be liberating, but in some cases, it can make sense to use debt to improve your financial situation or quality of life.

Written by Ben Luthi / June 30, 2022

Quick Bites

  • Being debt-free means you don't have any outstanding debt, though you may focus on having no debt outside of your mortgage payment or paid-in-full credit cards.
  • For the most part, the benefits of being debt-free outweigh the drawbacks, but low-interest debt may be helpful in some situations.
  • Research and develop a strategy for paying off your debt, and maintain your debt-free lifestyle once you reach that goal.

A debt-free life can feel incredibly freeing, and it's a worthy goal for many people. But not all debt is bad, and in some cases, it can make sense to borrow money to create more opportunities.

Understanding what it means to be debt-free—and alternatively, how you can leverage debt—can help you determine the right balance for your life.

Inside this article

  1. What does "debt-free" mean?
  2. Pros and cons of being debt-free
  3. Is being debt-free for you?
  4. How to become debt-free
  5. How to stay debt-free

What does it mean to be debt-free?

Being debt-free means that you don't have any outstanding debt payments. You've paid off all of your loans and don't use credit cards for everyday spending. The cash envelope budgeting method can be a good way to avoid all forms of debt.

That said, some people have made adjustments to the debt-free lifestyle to fit their priorities. For example, you may focus on being debt-free outside of your mortgage loan. Even with the most aggressive debt payoff strategy, it can take many years to pay off a mortgage loan. Also, it can be worth it to hold onto that low-interest debt, so you can use your extra cash for other important financial goals.

Additionally, while a credit card balance is technically considered debt, you may still consider yourself debt-free if you pay off your balance in full each month and have no other open credit accounts.

In fact, many credit cards offer a lot of value in the form of sign-up bonuses, rewards and other perks, which you'll essentially get for free if you can avoid interest charges with full payments.

The pros and cons of being debt-free

For some financial experts, there's no question that being debt-free is the way to live. But for most people, it may feel like nothing more than a pipe dream.

While having no debt comes with obvious perks, there are some potential downsides to consider as well.

Pros of debt-free living

  • More cash flow: Without debt, you don't have to make any monthly payments. This means that you'll have more cash flow to put toward other important financial goals and lifestyle improvements.

  • Less stress: Researchers have found a solid link between finances and mental health. In one survey conducted by the Money and Mental Health Policy Institute, almost half of respondents with debt also have mental health problems, and 86% of people say that their financial situation has worsened their mental health.[1] Becoming debt-free can potentially help improve your mental health by removing that stressor from the equation.

  • More options: If you have monthly debt payments, your options to explore other financial opportunities, such as investing, buying a home or starting a small business, may be limited. Without the burden of those monthly payments, though, you may be able to pursue certain opportunities that weren't available to you previously.

Cons of debt-free living

  • Your credit history may suffer: If you don't use credit at all, the gap in your credit history could negatively impact your credit score and even cause your score to vanish.[2, 3] That may not be an issue if you have enough cash to do everything you want. But if you want to buy a home or borrow money for other important purchases, the process of getting approved for a loan or line of credit can take longer, and the terms may not be as favorable.[4]

  • You may be able to get more bang for your buck elsewhere: There are many different types of debt, some of which can be surprisingly affordable. If you can score a low interest rate on a mortgage loan or auto loan, for instance, you can take the money you would've spent on the purchase and invest it for a potentially better return on your money. According to Fidelity Investments, a good rule of thumb is that if the interest rate is lower than 6%, it may be worth it to invest instead of paying off the debt.[5]

Is being debt-free right for you?

Every situation is different, but there aren't many downsides to having no debt, says Howard Dvorkin, a Certified Public Accountant.

"There’s simply no downside that isn’t completely overwhelmed by the upside,” says Dvorkin. “Don’t let anyone tell you differently.”

Headshot of Howard Dvorkin

Meet the Expert

Dvorkin is a longtime consumer advocate and the chairman of Debt.com. He’s a former president of the Association of Independent Consumer Credit Counseling Agencies. Dvorkin has also written two books about how consumers can improve their financial situations.

If you're worried about keeping up your credit history, using a credit card and paying it in full every month can help you maintain a good credit score.

Sure, it might make mathematical sense to take out a loan with a 3% interest rate to buy a car, and then use the money you would've spent on wheels to get an average return of 7% in the stock market. But if being debt-free is of personal value to you, the math may not matter so much.

The important thing is that you take the time to consider your situation and goals, and also how debt may help or hurt your chances of building your financial security. That will help you determine the best approach for your situation.

How to become debt-free

If you have the goal to be debt-free, but you're not quite there yet, here are some potential ways you can erase or reduce your debt over time:

  1. Write out the details of each debt, including balances, repayment terms and interest rates.

  2. Evaluate your financial situation to determine how much you can put toward your debt every month.

  3. Find ways to increase your income and cut your expenses to accelerate your debt repayment.

  4. Research debt payoff strategies—such as the debt snowball method—and pick the one that works best for you.

  5. Consider using other financial products, such as a personal loan or balance transfer credit card, to consolidate your debt.

  6. Be consistent with your approach to paying off debt. Evaluate your progress and make adjustments to your plan as needed.

  7. If your debt situation is dire, consider consulting with a credit counselor to get some guidance for your situation.

As you take stock of your current situation and your financial goals, it's also important to take the time to research and develop a strategy. That way, you can stick to it throughout the debt payoff process and long after you reach debt-free status.

How to remain debt-free once you achieve it

Creating a debt-free life can take several years for many people, so it's a major accomplishment to be proud of. But becoming debt-free doesn't mean you'll always stay that way.

If you're open to taking on debt in the form of credit cards that you pay off every month or a mortgage loan that you repay over 10, 15 or 30 years, stick to your plan. But otherwise, here are some tips to help you maintain your debt-free lifestyle, even in the face of financial emergencies:

  • Use a budget: Create a budget to plan and track your spending to ensure that you're always living within your means. This is especially important if you plan to continue using credit cards to take advantage of rewards and benefits.

  • Pay on time every month: If you have credit cards, pay your bill on time and in full every month to avoid interest. You'll also want to make sure you always pay your utilities, phone and rent bills on time to avoid potential fees and other negative consequences.

  • Build and maintain an emergency fund: Financial experts recommend a goal of three to six months' worth of expenses in your emergency fund. Depending on your situation, you may need more or less than that. The important thing is that you determine the right amount for you and build your emergency fund so that you don't need to worry about borrowing money to cover unexpected expenses. "Living debt-free can end in an instant. It takes one accident, one illness or one natural disaster," says Dvorkin. "If you’re debt-free now, sock away some of that money for literally a rainy day."

  • Spend less on large purchases: If you're planning to buy a car, consider a model that's a few years old over a brand-new one. And if you're thinking about buying a house, consider waiting until you have enough equity built up in your current home or other assets to pay for it in cash; or if you’re a first-time homebuyer, consider making a significant down payment to reduce your debt burden.

As you think about your lifestyle goals and preferences, use these and other tips to find the best ways to stay debt-free.

Article Sources
  1. "Money and Mental Health: The Facts," Money and Mental Health Policy Institute, https://www.moneyandmentalhealth.org/wp-content/uploads/2019/03/debt-mental-health-facts-2019.pdf.
  2. Jennifer White, "Why Did My Score Go Down When I Stopped Using My Credit Card?" Experian, February 1, 2020, https://www.experian.com/blogs/ask-experian/why-did-my-score-go-down-when-i-stopped-using-my-credit-card/.
  3. "What are the minimum requirements for a FICO Score?" myFICO, https://www.myfico.com/credit-education/faq/scores/fico-score-requirements.
  4. Jim Akin, "Can You Get A Mortgage With No Credit?" Experian, June 18, 2020 https://www.experian.com/blogs/ask-experian/can-you-get-a-mortgage-with-no-credit/.
  5. "Should you pay down debt or invest?" Fidelity Investments, October 1, 2021, https://www.fidelity.com/learning-center/personal-finance/pay-down-debt-vs-invest.

About the Author

Ben Luthi

Ben Luthi

Ben has been writing about money since 2013. He's been on staff at NerdWallet as a credit card writer and for Student Loan Hero, where he covered student loans and other personal finance topics. Ben's work has appeared in U.S. News, The New York Times, Experian, FICO, Credit Karma, Bankrate and more

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