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Debt is anything you owe to someone else. Financially speaking, debt is acquired by borrowing money from a lender such as a bank, credit card provider or private lender, to make a purchase. To repay the debt, you give back the amount you originally borrowed (the principal amount<\/strong>) plus an extra charge that\u2019s usually expressed as a percentage of the original loan amount (the interest rate<\/strong>).<\/p>Good debt<\/h4>
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If you borrow money for something that will increase in value, it\u2019s considered a \u201cgood\u201d debt. Good debts tend to come with low to moderate interest rates and will provide you with a return on your money. Examples include:<\/p>
- Mortgages<\/li>
- Home equity lines of credit (HELOCs)<\/li>
- Student loans<\/a><\/li>
- Small business loans<\/a><\/li><\/ul><\/div>
Bad debt<\/h4>
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<\/p>On the other hand, debt used to purchase something that will hold or decline in value is considered \u201cbad\u201d debt. Bad debts often come with high interest rates and don\u2019t increase your net worth. These include:<\/p>
- Credit cards<\/a><\/li>
- Payday loans<\/a><\/li>
- Car loans<\/a><\/li>
- Personal loans<\/a> used to redecorate your home, travel or buy consumer goods<\/li><\/ul><\/div><\/div>Whether a debt is \u201cgood\u201d or \u201cbad\u201d is based on what the funds will be used for. For instance, a personal loan could be considered \u201cgood debt\u201d if used to finance a business or \u201cbad debt\u201d if used to buy a new home entertainment system.<\/div><\/article><\/p>
Credit cards<\/a><\/h4>
Credit cards make it easy to spend money you don\u2019t have and get instant gratification. Unfortunately, once interest charges start to accumulate on your credit card charges, your debt levels can quickly rise.<\/p>
Credit cards come with some of the highest interest rates around, with many cards carrying rates as high as 19.99%. And if you run up a hefty bill on more than one card, your debt will get even more difficult to manage. Credit cards are also notorious for charging loads of fees for balance transfers, foreign transactions, currency conversions, late payments, annual card maintenance, cash advances and more.<\/p>
- Best* credit cards<\/a><\/li>
- Low interest credit cards<\/a><\/li>
- Business credit cards<\/a><\/li>
- Rewards credit cards<\/a><\/li><\/ul>
How to manage your credit card debt<\/h3>
Credit card interest rates can be high and extra charges can add up quickly, so it\u2019s important to get on top of your balance (or balances) as soon as possible. Here\u2019s what to do:<\/p>
Make regular repayments<\/b><\/h4>
Always make at least the minimum payment before the due date. If you\u2019re someone who tends to be forgetful, use the autopay option to ensure you never miss a payment.<\/p>
Usually you\u2019ll have to pay between 2% and 10% of your total balance. However, since interest is calculated based on your daily balance, you can actually reduce the amount of interest that\u2019s charged each month by making additional repayments.<\/p>
\n \nExample: How much can you save by changing payment frequency?<\/h4>\n
Let's say your credit card debt is $5,000 and your minimum repayment amount is 2%, or around $100 per month. If your card's interest rate was 18%, here's the different interest charges you'd get depending on your payment options:<\/p>
Monthly payments of $100: <\/b>$45.86 in interest per month
Bi-weekly payments of $50: <\/b>$44.83 in interest per month
Weekly payments of $25:<\/b> $44.64 in interest per month<\/p>When compared to monthly payments, you can save around 3.3% by making payments bi-weekly and 3.6% by making weekly payments. The more you pay overall, the better the savings could be.<\/p>\n
* This is a fictional, but realistic, example.<\/strong><\/small><\/p>\n<\/div>\n<\/article>\n\n\n\n
Pay more than the minimum<\/b><\/h4>
It would take years to pay off your credit card if you only paid the minimum amount each statement. Check out the example:<\/p>
- Low interest credit cards<\/a><\/li>
- Payday loans<\/a><\/li>
- Small business loans<\/a><\/li><\/ul><\/div>