Credit Card Debt- Good Debt Vs. Bad Debt

Today it is a world of consumerism. Households in the western world and developed nations are living a life of dream. Everybody here wants to own big townhouses, holiday homes, and big cars, go on expensive vacations, and shop high end retail. However, this dream life comes at a heavy cost. Households across America, Europe, and Australia are finding themselves neck deep in debt.

Statistics show that on an average every American family has at least one credit card with more than $10,000 of outstanding balance. When this debt situation gets out of control, many users find themselves being constantly hounded by collection agencies, building a bad credit history and ultimately driving themselves to bankruptcy. Given below are some pointers and considerations that have been drawn up by financial gurus and will guide you to manage your credit card and other debts better.

Pointer #1: The monthly payments of your overall debts should not exceed 36% - 40% of your household monthly income. Remember that this includes all forms of debts including mortgage for home, car loans, personal loans and credit card debts. If your monthly debt payments go beyond 50% of your monthly income, it is time for you to think of some drastic solutions like debt consolidation loans to bring your financial situation back under control.

Pointer #2: Distinguish between good debt and bad debt. Experts say that good debts are those which go towards building assets. Therefore debts like mortgage, educational loan, or car loans are good debt as these are building up assets for you. An example of a good debt on a credit card is purchase of a collectible item which can be sold off at a later date in the market at least in the same rate or with a profit. Most other forms of credit card expenditure like payment of monthly household bills, retail shopping, and travel are considered bad debts as these end up forming a dead weight on the debtors.

Pointer #3: Any purchase on your credit card that which comes on the category of "not needed" and "cannot afford" is also a bad debt. Hence that fancy bag or the glittering dress which is actually beyond your spending means is dangerous for your finances.

Pointer #4: Borrowing cash on your credit card is again considered a bad debt. This is simply because the interest rates charged on cash advance are exorbitant, even higher than normal purchases on your credit card. On an average, a credit card company charges you 13% - 21% on normal purchases, whereas the interest rate in cash advances is 30% and above. Therefore wherever possible, try and swipe your credit card for a normal charge instead of withdrawing cash for payment.

Pointer #5: Payment of household utility bills and daily expenses through credit cards is again considered bad debt. Daily household expenses should be a part of your monthly expenditure budget and not a part of your debt.

Keeping these basic considerations and pointers in mind will help you avoid building up unmanageable debts on your credit card. These are simple calculations and once you are in the habit of avoiding bad debts, your finances would be under your control and not the other way round.