Why is credit card debt considered “bad” debt?
Credit card debt is among the worst types of having. Here’s why.
- Certain types of debt are considered healthy, such as mortgages and car loans.
- Credit card debt is generally considered unhealthy and a category of debt that you should try to avoid.
There are different ways to borrow money. You can take out a loan for a specific purpose, such as an auto loan to buy a car, or you can take out a personal loan, which lets you borrow money for any reason. You can also borrow money through your credit cards – namely, by building up a balance and then paying it off however you can. As long as you make your minimum payments on time each month, you won’t violate the terms of your credit card agreements.
But while credit card debt can be a fairly common type of debt, it’s generally considered an unfavorable type to have. Here’s why you better stay away from it.
1. It can cost you a lot of interest
Almost every time you borrow money, you have to pay interest. But credit cards tend to charge much higher interest rates than other types of debt, so borrowing through a credit card is likely to cost you more than, say, a personal loan. Plus, credit card interest can be variable, meaning the interest rate you start with can climb over time, making it even harder to pay off your balance.
2. It doesn’t usually help you own assets that are increasing in value
When you take out a mortgage to buy a house, you’re going into debt, but you’re doing it to buy something that is likely to increase in value over time. This is why mortgages are considered a healthy type of debt.
When you charge expenses to a credit card, you’re typically buying items that won’t go up in value. A new television, for example, can make life more enjoyable, but its value is likely to decline after a few years as its components wear out and new models come onto the market. And because you’re paying interest on the items you pay for with a credit card over time, you’re setting yourself up to lose money rather than potentially gain it, like you might sell a house in a higher price than what you paid for it.
3. It can hurt your credit score
When you take out a mortgage, car loan, or personal loan and make your monthly payments on time, your credit score might actually improve. But even if you make your minimum monthly credit card payments on time, too high a balance could lower your credit score.
An important factor that goes into calculating your credit score is your credit utilization rate. This ratio measures the amount of available revolving credit that you use at the same time. When this ratio exceeds 30%, it can hurt your credit score. This means that if your total spending limit on your various credit cards is $10,000, owing more than $3,000 at a time could cause your score to drop.
Sometimes credit card debt is unavoidable. If you’re faced with an unexpected repair to your home or vehicle and don’t have the savings to cover it, you may have no choice but to put that bill on a credit card. credit and pay off your balance over time. But in most cases, it pays to avoid credit card debt as much as possible and find other, more affordable ways to borrow money when you need it.
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