Bad debt
The concept of bad debt comes in when discussing thepurchase of disposable items or durable goods or, in general, the use of high interest credit cards.
"The problem is, people don't realize that credit cards are just plastic cash," says Chris Bender, Communications Manager for the National Foundation for Credit Counseling in the U.S.. "They think when they pay with credit cards they don't have to pay for it quickly, and so they don't keep track of what they spend.
"When you hand someone cash, it's a psychological wake-up. 'Why, I just gave away $40.' When you charge something, you don't see the money go, and in your mind that makes a difference."
But buying on credit isn't the same as buying with cash, because cash doesn't make you pay interest on items as they drop in value.
"When you buy clothes, they're probably worth less than 50 percent what you pay for them when you walk out the door," says Bach. "So if you borrowed to pay for them, that's bad debt."
Not to mention what that debt could potentially do to your credit rating.
"Your debt-to-income ratio shouldn't go above 20 percent," says Rob Harol, Credit Card Category Manager at LowerMyBills.com. "If you find yourself above that, it doesn't look good on credit reports, even if you're making payments on time."
When it comes to buying durable goods that won't contribute to wealth generation, Bach offers a basic rule of thumb. "My grandma used to say that if you're going to buy something that doesn't go up in value, and you can't afford to pay cash, then you can't afford it."
Exacerbating the bad debt factor is that people will apply for store credit for the savings, offers that say if you open a credit card account today, you can take 10 percent to 20 percent off the cost of your purchase. What people often don't realize is how much of that savings will be destroyed by the high interest rate on the card if they fail to pay for the items immediately.
"You can open a store credit card account," says Bach, "and what they're not telling you is that after the first few months, the rate jumps to 20 percent or greater."
The concept of bad debt comes in when discussing thepurchase of disposable items or durable goods or, in general, the use of high interest credit cards.
"The problem is, people don't realize that credit cards are just plastic cash," says Chris Bender, Communications Manager for the National Foundation for Credit Counseling in the U.S.. "They think when they pay with credit cards they don't have to pay for it quickly, and so they don't keep track of what they spend.
"When you hand someone cash, it's a psychological wake-up. 'Why, I just gave away $40.' When you charge something, you don't see the money go, and in your mind that makes a difference."
But buying on credit isn't the same as buying with cash, because cash doesn't make you pay interest on items as they drop in value.
"When you buy clothes, they're probably worth less than 50 percent what you pay for them when you walk out the door," says Bach. "So if you borrowed to pay for them, that's bad debt."
Not to mention what that debt could potentially do to your credit rating.
"Your debt-to-income ratio shouldn't go above 20 percent," says Rob Harol, Credit Card Category Manager at LowerMyBills.com. "If you find yourself above that, it doesn't look good on credit reports, even if you're making payments on time."
When it comes to buying durable goods that won't contribute to wealth generation, Bach offers a basic rule of thumb. "My grandma used to say that if you're going to buy something that doesn't go up in value, and you can't afford to pay cash, then you can't afford it."
Exacerbating the bad debt factor is that people will apply for store credit for the savings, offers that say if you open a credit card account today, you can take 10 percent to 20 percent off the cost of your purchase. What people often don't realize is how much of that savings will be destroyed by the high interest rate on the card if they fail to pay for the items immediately.
"You can open a store credit card account," says Bach, "and what they're not telling you is that after the first few months, the rate jumps to 20 percent or greater."
