Is Credit Card Debt Bad Debt?

By: Michael Millington

Carrying credit card debt can turn into a costly endeavor. Before you know it, a small amount of credit card debt can grow exponentially if not monitored and paid on a regular basis. However, there is a way to have debt work in your favor. Maintaining debt requires as much discipline and dedication as it takes to eliminate debt. But first, you must understand what constitutes as controlled, or “good” debt and how to keep it from becoming bad debt.

 

Is There “Good” Credit Card Debt?

 

It might be hard to think of any debt as being good. However, in regards to your credit rating, carrying a certain amount of debt can actually help your credit in the long run. The critical aspect of carrying the debt is to make sure you keep the debt at a controlled level. Having your debt reach an amount you can no longer manage can have an adverse effect on your credit. Finding a manageable balance is key to making debt work for you.

Each person has a FICO score that is impacted by their credit behaviors. One of the biggest factors when calculating a FICO is how much of your available credit is used. It is generally accepted that an optimal range for credit usage is at most 20% of your available credit. This percentage means that the actual dollar amount will change depending on the amount of available credit you have. If you open a new credit account (another credit card or loan), then your available credit will increase. Your credit usage percentage will fluctuate accordingly, meaning your 20% limit will increase along with your available credit.

Although keeping a 20% credit usage is what many financial institutions suggest, the main concern in maintaining a healthy FICO score is having the ability to pay off your credit balance when you have one. When you maintain a constant behavior of paying off your credit debts every month, your credit report will reflect competent credit usage. Generally, this can lead to your FICO score increasing. This can be considered a proper use of credit card debt.

 

When Does “Good” Debt Go Bad?

 

In keeping with a balance between how much credit you utilize and making your monthly payment, you might observe a positive trend with your FICO score. If you do not keep this balance up, chances are you might end up with more debt than your income can comfortably handle. This is when your “good” debt turns into the kind of debt people do not want. Once your debt gets out of control and you can no longer keep it within your budget, it might be necessary to seek professional help to eliminate it.

While staying within a premade budget can help to avoid falling into too much debt, neglecting to budget can have the opposite effect. Putting too much use into your credit cards can bring about a debt situation that might be too much for you to handle. If your debt grows to this point, certain things can happen that may hinder your ability to pay off the amount that you owe. A common occurrence in situations that involve unsecured debt sees you unable to pay off the principle amount of debt due to the interest and fees accruing on the past due amount. Losing control over your finances can quickly place you in a downward spiral.

This type of debt can have vast negative effects on your finances and your credit rating. Carrying too much debt for too long can result in late payments being reported to the credit bureaus. Some creditors might even attempt to settle your debt for you if they have not received payment from you in a while. This might happen because the creditors think they won’t receive the exact amount of money you owe them. While this might seem like a great idea, this also might have some ill effects towards your credit rating.

 

How Do You Maintain “Good” Debt?

 

Maintaining “good” debt is not as difficult as many may think. Most credit card holders look at having any kind of debt as a bad thing. If you do then you might consider debt in extreme fashion. While aggressively paying off your debt might not be a bad thing, having a controlled payment method for your debt can help keep your debt low while allowing you to reach and complete other financial goals you may have.

One way to maintain a certain level of manageable debt is to extend your budget towards your credit card usage. Take into account how much available credit you have and what would be the optimal spending amount. If you stick to a credit budget, chances are you will never have your debt reach levels that you cannot control. Exhibiting discipline in your credit spending can help to lessen the amount of debt you accrue on a regular basis.

Another way to control your level of debt is to eliminate the use of certain credit cards. Having multiple lines of credit can help to improve your FICO score due to the variety of credit increasing and the overall age of your credit growing with each card. However, the potential for accruing overwhelming debt increases with the more types of credit you have. Delegating certain cards to certain tasks can help to alleviate the stress of having debt spread across multiple credit cards. A card for regular use can be separated from a card that can only be used for emergencies. This can lessen the amount of times you have to pay credit card bills and help to keep your debt low.

 

Even if you follow a budget to the exact letter, there may be times when debt can grow out of your control. Carrying thousands of dollars in debt is a terrifying thought, and although it can happen you don’t have to face your debt alone. Guardian Debt Relief can help you to eliminate your credit card debt through the power of debt settlement. Our debt professionals are standing by to answer your questions and to help find you a unique solution to your financial issues. A free consultation is available upon your phone call so don’t hesitate to contact us. Take the first step and reach out to Guardian Debt Relief today!