Bad Debt

You never want to be overwhelmed with debt!

Bad debt is when you finance things that you consume and you do not have the money, or a plan, to repay the debt within a reasonable amount of time. A car or home is a lasting item, and it doesn’t just disappear when you use it. You can also use these things to increase your overall wealth. However, when you use your credit card to pay for your dinner night after night, you will then need to pay off something you already consumed and cannot get back.

Credit cards are generally seen as bad debt because of the things that credit cards are usually used to purchase. Buying a new outfit each week will accumulate debt and a large balance at the end of the month. Most people cannot afford to pay off their credit card bill each month – that’s when it becomes a bad debt. Bad debt will hurt your overall credit score.

While credit cards are usually seen as a bad form of debt, they can be used in such a way as to be classified as good debt. Their use can also increase your wealth, but there is a catch. For instance, if you use your credit card to pay for all of your food, clothing, and other items during the month, it can be a good debt if you can pay your balance off in full each month. This can happen with proper budgeting and if you have already set aside the money.  It is good debt if you already have the money and using credit just makes life easier. Paying off your credit cards each month actually increases your credit score.