What Does It Really Mean to Be Debt-Free?

Quick Answer

Being debt-free means you don’t owe any outstanding debt. However, carrying no debt other than your mortgage payment or a credit card you pay in full each month could make sense.

Young woman with eyeglasses smiling as she looks down at the papers she's holding.

For most people, living debt-free is a meaningful goal that represents a level of financial freedom. Student loans, car loans and credit card debt can feel overwhelming, but eliminating debt can relieve the stress.

But what does it really mean to be debt-free? For some, being debt-free means living without any outstanding debts, while for others, it may mean living with only "good debt," such as a low-interest home loan. Let's examine the different definitions of being debt-free along with useful practices to achieve a debt-free life.

What Does Being Debt-Free Mean?

As you learn more about living without debt, you may notice the term "debt-free" has a couple of common meanings. You can use the purist definition, whereby debt-free means you have no debt at all—from credit cards, loans or other creditors. As a result, you don't rely on credit cards or other forms of credit for everyday spending.

On the other hand, you may prefer to subscribe to a looser definition of "debt-free," where you're free of debt you carry from month to month, payday loans and other forms of "bad debt" but you may make exceptions to fit your needs. This definition may be advantageous because it allows you to achieve milestone goals like owning a home without high-interest debt burdening your monthly finances.

Pros and Cons of Living Debt-Free

Understanding the benefits and downsides of living debt-free (however you define it) can help you decide whether you want to wipe out all your debts entirely or modify your debt goals to suit your lifestyle.

Pros of Living Debt-Free

  • More money in your pocket: When you have debt, you can accrue interest charges which take away from your income. That's not the case when you are debt-free. The price you pay for purchases is the actual price you pay. Since you don't have to waste your hard-earned money paying interest, you'll have more money to direct towards financial goals, travel plans or other purposes.
  • More financial security: Monthly debt payments can limit your available cash to save for an emergency fund, invest or even start a business. By freeing up cash in your monthly budget, you'll have more freedom to fortify your financial health and take advantage of new opportunities.
  • Less stress and anxiety: Debt can be stressful, leading to mental, emotional and physical health issues. According to survey data from the Money and Mental Health Policy Institute, 46% of debt holders are dealing with mental health problems, and 86% report their financial circumstances have made their mental health worse.

Cons of Living Debt-Free

  • Negative credit impact: Experts often recommend making regular on-time payments on your credit accounts to improve your credit score. That's because payment history makes up 35% of your FICO® Score , the credit score used by 90% of top lenders. Without open accounts, there may not be enough credit activity for credit bureaus to calculate your score, which could harm your credit. Of course, that's not a problem if you don't want to play the credit game and have enough cash to take care of your financial needs.
  • Might sacrifice opportunities: Naturally, living debt-free is preferable to taking on debt, but sometimes debt is necessary to pursue goals and dreams. For example, it may make sense to take on a student loan to attend college and potentially increase your earning power in the future. Remember, only borrow what you need, and never borrow more than you can afford to repay.

How to Become Debt-Free

Becoming debt-free can take time, but it's certainly achievable if your effort is consistent and you take the right steps, including the following:

  • Write down all your debts, including your current balances, interest rates and monthly payment amounts.
  • Review your monthly expenses to determine how much money you have left to devote to paying down your debts every month.
  • Examine debt repayment strategies, such as the debt avalanche and debt snowball methods, and choose the one you prefer.
  • Look for ways to save money, like eating out less or canceling gym and streaming subscriptions you don't use. Use the extra savings to pay down your debt balances.
  • Find ways to make more money that you can apply to your debt. For example, you might volunteer for overtime, ask your employer for a raise or take on a side hustle to earn extra cash.
  • Lower your interest rates by calling your creditors and requesting an interest rate reduction.
  • Consider consolidating your debts with a balance transfer credit card with a 0% introductory period or through a lower-rate debt consolidation loan.
  • If you're unable to pay down your debts, consider working with a nonprofit credit counseling agency that can help guide you in the right direction.

Start your journey by learning more about getting out of debt and staying debt-free.

The Bottom Line

In the strictest sense, debt-free means living without owing money to any bank, lender or otherwise. However, you may prefer making adjustments to your debt-free lifestyle to help achieve a major life goal, such as owning a home or attending college.

No matter how you proceed, it's essential to know how your debt repayment efforts may impact your credit. You can get a free credit report and credit score from Experian to stay on top of your credit and see how you may be able to improve your credit.