Why Is Credit Card Debt Considered 'Bad' Debt?
There are different ways you can go about borrowing money. You can take out a loan for a specific purpose, like 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 via your credit cards -- namely, by racking up a balance and then paying it off as you're able to. As long as you make your minimum payments on time every month, you won't be violating the terms of your credit card agreements.
But while credit card debt may be a fairly common type of debt, it's generally considered an unfavorable type to have. Here's why you're better off steering clear of it.
1. It can cost you a lot of money in interest
Pretty much any time you borrow money, you're required to pay interest on it. But credit cards tend to impose much higher interest rates than other types of debt do, so borrowing via a credit card is apt to cost you more than, say, a personal loan. Plus, credit card interest can be variable, which means the interest rate you start out with could climb over time, making your balance even more difficult to pay off.
2. It generally doesn't help you 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 so to purchase an asset whose value is likely to increase with time. That's why mortgages are considered a healthy type of debt.
When you charge expenses on a credit card, generally speaking, you're buying items that won't gain value. A new TV, for example, might make life more enjoyable, but if anything, its value is likely to decrease after a couple of years as its components wear out and newer models hit the market. And because you're paying interest on the items you pay off over time with a credit card, you're effectively setting yourself up to lose money rather than potentially gain some, as you might by selling a house for a higher price than what you paid for it.
3. It can damage your credit score
When you take out a mortgage, car loan, or personal loan and make your monthly payments on time, your credit score could actually get a boost. But even if you make your minimum monthly credit card payments on time, too high a balance could drag your credit score down.
One big factor that goes into calculating your credit score is your credit utilization ratio . That ratio measures the amount of available revolving credit you're using at once. When that ratio exceeds 30%, it can cause damage to your credit score. That means that if your total spending limit across your different credit cards is $10,000, owing more than $3,000 at once could cause your score to get dinged.
Sometimes, credit card debt is unavoidable. If you're hit with an unexpected home or vehicle repair and you don't have the money in savings to cover it, you may have no choice but to put that bill on a credit card and pay your balance off over time. But for the most part, it pays to avoid credit card debt to the greatest extent possible and find other, more affordable ways to borrow money when you need to.
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