Credit Cards

Why is credit card debt considered “bad” debt?

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Credit card debt is among the worst types of debt you can have. This is why.

Key points

  • Some 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 you can 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 allows you to borrow money for any reason. You can also borrow money through your credit cards, that is, 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. Here’s why you better stay away from him.

1. It can cost you a lot of money in interest

Virtually every time you borrow money, you must pay interest on it. But credit cards tend to carry much higher interest rates than other types of debt, so borrowing through a credit card may cost you more than, say, a personal loan. Also, credit card interest can be variable, meaning the interest rate you start with could increase over time, making your balance even harder to pay off.

2. It generally doesn’t help to own assets that increase in value

When you take out a mortgage to buy a home, you’re taking on debt, but you’re doing it to buy an asset that is likely to appreciate in value over time. That’s why mortgages are considered a healthy type of debt.

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When you charge expenses to a credit card, generally speaking, you’re buying items that won’t gain value. A new television, for example, may make life more enjoyable, but if anything, its value is likely to decline after a couple of years as its components wear out and new models come onto the market. And because you’re paying interest on items you pay for over time with a credit card, you’re actually setting yourself up to lose money rather than potentially earn it, as you would if you were selling a house for more than it was worth. the one who would pay paid for it.

3. It can hurt your credit score

When you get a mortgage, car loan, or personal loan and make your monthly payments on time, your credit score may 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 ratio. That ratio measures how much available revolving credit you’re using at one time. When that ratio exceeds 30%, it can hurt your credit score. That means 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 suffer.

Sometimes credit card debt is unavoidable. If you run into an unexpected home or vehicle repair and don’t have the money saved to cover it, you may have no choice but to put that bill on a credit card and pay off your balance over time. But for the most part, 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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