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Bottom Line Up Front

  • It’s not always a bad thing to have debt. “Good” debts create value and can be seen as an investment while “bad” debts are for things that lose value and don’t help build wealth.
  • When managing debt, it’s important to keep track of what you owe, pay bills on time and try to avoid unnecessary interest charges.
  • Credit cards are a useful tool, but you have to use them wisely to avoid racking up bad debt.

Time to Read

7 minutes

May 12, 2022

About Debt

Living without debt these days is next to impossible. Although debt may have a bad reputation in some circles, many see debt falling into 2 categories: “good” debt and “bad” debt.

It’s important to know that all debt (or money owed) isn’t created equal, and it’s even better to know the differences in types of debt.

Before buying anything on credit, it’s a good idea to determine whether you’re accruing good debt or bad debt. How can you tell?

Good Debt

Good debts are those that create value and can be seen as an investment—think mortgages, loans for college education or small business loans.

School loans and mortgage debt often have lower interest rates than other kinds of debt. Student loans can raise your ability to command a larger income. Real estate loans, ideally, benefit you if the property increases in value over the course of the loan term, so that your rising home equity offsets the interest payments to your lender.

Bad Debt

Bad debts are those that were taken on to cover assets that quickly decrease in value and don’t generate income.

Bad debt often carries a high interest rate—think payday loans or cash advance loans. Credit card debt could be considered bad debt if it’s not managed properly.

The rule of thumb for avoiding bad debt is simply this: If you can’t afford it, don’t buy it. Every month that you make a partial payment on high-interest consumer debt, that item loses value while the price you paid for it increases.

Sometimes, it’s not so easy to tell if debt is good or bad. If you need to take out an auto loan so you can get to work and earn a living, that’s probably good debt—even though the asset (your car) is depreciating every day.

But, if you could have paid cash for something cheaper and instead opted to take out a car loan to buy something fancy, that’s probably bad debt.

When it comes to your credit history, well-managed debt could actually help you improve your credit score and make progress on your financial goals. When purchasing on credit, weigh the terms against the utility of the asset you want to take on debt for—for example, a student loan vs. a vacation, or a business loan vs. a new phone.

Debt Management

The simplest way to maintain a manageable amount of debt is to ensure you never owe more than you can pay.

But simple isn’t always easy. Follow these tips to better manage your financial situation:

  • Know how much you owe. Make a list of all of your debts. Include the debt total, monthly payment, interest rate and due date. Track your progress by updating the list regularly as you make loan payments.
  • Pay your bills on time each month. Set up automatic payments so you don’t incur late fees. Determine which bills are due first and pay them in order. Pay more than the minimum on each bill if you’re able. Paying the minimum on high-interest debt will usually take you quite a long time to make real progress, but if that’s all you can pay, it could keep your debt from increasing as long as the minimum payment amount is greater than the interest charged each month.
  • Pay off the high-interest debts first. High-interest debt costs you the most, so you’ll want to immediately wipe it out to save money. The faster you pay these debts off, the less you’ll pay in interest charges.
  • Start an emergency fund. That way, should an unexpected expense come up, you won’t have to use a credit card to pay. Many people wait to create an emergency fund until they’ve paid off their debts. But you can easily be caught in a vicious, never-ending cycle of paying debt and having no savings if you operate like that.

Credit Card Debt

NerdWallet reports that credit card debt is the fourth-highest source of household debt behind mortgages, student loans and auto loans, with an owed average of $357 billion, according to statistics collected by the Federal Reserve and other government data.

You might not realize it, but every time you use your credit card, you’re essentially taking out a loan. The purchases you put on your card are bought with your line of credit, and you’re responsible for repayment for whatever you buy. When used with care, a credit card can be a great tool for building credit history; used carelessly, however, it can lead to unmanageable debt and threaten your financial future.

Credit cards can offer the temptation to overspend, but you can curb that urge by using these tips:

  • Budget. Budget. Budget. Keep track of your finances with an up-to-date budget that accurately reflects your monthly income and expenses. Knowing the intricacies of your personal finances is a huge step in really understanding how much you can afford.
  • Borrow only as much as you repay. A good rule of thumb is to not tie up more than one-third of your income in debt, including mortgage, credit cards and installment loans.
  • Pay bills in full and on time. Be mindful of when your credit card bills are due and make a concerted effort to pay them off in full each month. Only borrow what you can pay back within a billing cycle.
  • Check your credit report regularly. By keeping an eye on your credit report, you can monitor your status and whether there are mistakes that could negatively affect your financial health. You can request a free credit report annually from the 3 credit reporting agencies at

Smart Credit Card Use

Used wisely, credit cards are a great tool for everyday spending, making large purchases (such as airline tickets or furniture) or to use in emergencies as a supplement to your savings.

Keep in mind that in addition to paying off whatever you charge to your credit card, you're also responsible for paying any accrued interest on those transactions and on any fees, such as transaction, annual and late fees. Always strive to pay in full and on time to avoid accumulating interest, which adds to your debt.

Credit cards come with a fixed or variable rate of interest. When you’re shopping for a card, look for a low, fixed-rate card to avoid a higher interest rate if and when rates change. Card companies can generally raise rates on fixed-rate cards, but they must give you 45 days’ notice. In general, variable-rate cards can raise rates without notice.

Know the real cost before you use a credit card. Consider the following:

  • What is the APR (annual percentage rate) and will it increase after the introductory rate? If so, how much?
  • Does it have an annual fee? How much?
  • Are there late fees? What are they?
  • Does it have a grace period before interest charges kick in? How long? What is the APR when the grace period ends?

Missed Payments

What happens if you miss a due date or are unable to make your credit card payment? Even if it’s just one past due payment, you may be charged a late fee (usually around $25 to $35), which could be added to your balance and accumulate interest like the rest of your debt. Your credit card company can also report the delinquency to the 3 major credit bureaus (Experian®, Equifax® and TransUnion®)1, which may negatively impact your credit score. After multiple missed payments, some card issuers may hit you with a penalty APR, raising your rate.

Failing to pay your credit card debt could have a big impact on your credit score, since each payment you make gets recorded into the ledger of your credit history. Late payments or failing to pay at all may quickly lead to a lower credit score because 35% of your score* is based on your payment history, according to FICO ®.1

With a debt in collections, your credit score could go down. If your credit score falls far enough, you may find yourself paying higher interest rates on a variety of financial products, from your credit cards to future mortgages.

Regain Control of Your Finances

If personal issues arise that make it hard for you to keep up with your minimum payments, you should reach out to your credit card issuer immediately and explain your situation. You may be able to negotiate a payment plan for your credit card bill.

You might also want to meet with a personal finance counselor at your financial institution or bank for additional debt management strategies.

Regain Control of Your Finances

If personal issues arise that make it hard for you to keep up with your minimum payments, you should reach out to your credit card issuer immediately and explain your situation. You may be able to negotiate a payment plan for your credit card bill.

You might also want to meet with a personal finance counselor at your financial institution or bank for additional debt management strategies.

We're Here to Help 

At Navy Federal, we built a tool you can use to calculate what it will take to pay off your credit card debt. Check it out below. With some focus and dedication, you should be able to pay off your credit card debt.

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Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

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