There are many important milestones in life that will require you to pass a credit check: renting an apartment, purchasing a car, qualifying for a mortgage or other loan, or even getting a job.
You may have heard that, for this reason, having no credit can be worse than bad credit. This is why opening a credit card can be important for building credit card history.
But what if you rack up credit card debt? Is that “bad” debt? And will it hurt your credit score?
Let’s take a closer look at credit history and debt to learn how to answer the question, “What is bad debt?”
Can Debt Ever Be Good?
In recent years, the average consumer debt has grown sharply. Making debt payments gives families less disposable income every month, and can make it difficult to save for retirement.
So can taking on debt ever be a good thing?
The short answer is yes. The longer answer is that taking on debt can be a good thing if it can help build assets for the future.
For instance, taking on student loan debt might help you secure a higher-paying job. If you have a mortgage, your home may gain value, which could increase your net worth. Or, taking out a loan to start a business could help you build a stream of income.
Is Credit Card Debt Bad Debt?
So where does that leave credit card debt? In general, credit card debt is not considered good debt–for several reasons.
It is Not Used for Appreciating Assets
Buying a home is considered good debt because the home can increase in value, and eventually be worth more than your debt. This is usually not the case with the items you purchase with a credit card.
For instance, if you use a credit card to purchase a sofa, that furniture becomes less valuable over time. Or you may use it to purchase something with no lasting value, like a meal out or a night at a hotel.
High Interest Rates
Another problem with credit card debt is high interest rates. While a home loan or a car loan usually has an interest rate between 4% and 9%, a credit card may have an interest rate higher than 16%. This high rate causes your debt to grow.
So are Credit Cards Bad?
So if credit card debt is bad debt, does that mean credit cards are bad? Not necessarily.
The key is to use credit cards in a responsible way. If you only ever pay the minimum payments on your card, you will rack up a lot of bad debt. But if you pay off your full statement balance every month, your credit card can help you build credit and make secure purchases.
Understanding “What is Bad Debt?”
The short answer to the question, “What is bad debt?” is any debt that cannot be leveraged. While some debt might increase your earning potential or build equity, credit card debt grows into more debt.
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