Not all debt is created equal. “Non-performing loans” provide no growth value, accumulate high interest and can take years to pay off.
The word “debt” can make people flinch. Nobody wants to go into debt. But there is a difference between good debt and bad debt. Debt that helps you acquire valuable assets, such as a home, or that helps you improve your life, such as student loans, is generally considered good debt.
But one kind of debt is always considered bad debt and hurts people more than it should. It’s credit card debt. Here’s why.
1. High interest rates.
Credit card debt is usually the most expensive debt you have. Credit card interest rates are often in the double digits and can exceed 20% even for those with good credit. Cumulatively, he’s estimated to have $986 billion in credit card debt, according to a study by . Federal Reserve Bank of New York. These high interest rates can make simple purchases last longer than necessary.
2. It will take several years to pay off the minimum payment in full.
Paying your bills is super easy with online bill payment, but don’t forget to check your credit card statement. Specifically, check the minimum payout warning included there. Shows in black and white how long (usually years) it will take to pay off the balance in full if you only pay the minimum payment. This can be very depressing (and can make the latte you purchased feel less valuable). If you have credit card debt, try to pay much more than the minimum to save money.
3. It’s not something you can build off of what you buy.
Mortgages, student loans, and business loans are usually considered good debt because they are often investments that grow over time. Additionally, these loans often have the lowest interest rates for borrowers, while the assets acquired on these loans are considered “valuable assets” and provide positive returns over the long term.
Credit card debt is usually accumulated through purchases of “depreciable assets” such as clothes, dinner, and impulse purchases. There is nothing wrong with these types of purchases, but prolonging the purchase and paying high interest rates create unnecessary cycles of debt.
Bottom Line: Understand the difference between good debt and bad debt, and that credit cards are a profitable financial tool when used correctly. It’s important not to spend more than you can afford and to think carefully about the debt you acquire. Be careful not to let your credit card balance become a lingering liability. To build strong and healthy credit, paying your card balance every month is ideal.
Jennifer Streaks is Business Insider’s Senior Personal Finance Reporter and Public Spokesperson, and a financial contributor for The Grio. Jennifer is a nationally recognized expert on money and affordable lifestyle living and an acclaimed financial columnist who has been featured on CNBC, Forbes, ABC, MSNBC, CBS and more.
TheGrio is available free on your TV via Apple TV, Amazon Fire, Roku and Android TV. TheGrio’s Black Podcast Network is also free. Download the Grio Mobile App today! listen ‘write blackwith Maisha Kai.
post What is the difference between good debt and bad debt? first appeared in Zagrio.