If you’re over your head in credit card debt you may find it hard to believe that there could be times when you should rack up more debt. But there may be many more times when it is not a good idea to go further into debt.
Good debt and bad debt
Many financial experts recognize that there are two kinds of debt – good debt and bad debt. Bad debt is a debt you run up on credit cards for items that have no lasting value. For example, you might think it worthwhile to charge clothing to a credit card. But clothing does not last nor increase in value. In fact, it starts losing value the minute you start wearing it.
What is good debt?
Good debt is a debt you use to pay for something that has lasting value or that will increase in value. Probably the number one example of this is a house. You could be carrying a good deal of credit card debt but it might make sense to buy a house (take on a mortgage). It will have lasting value and should even increase in value over the years. You could get a mortgage as of this writing with an APR (average percent rate) of less than 5%. Assuming that house increases in value over the course of the next 5 or 10 years, you should come out well ahead in the deal. That should be a good reason to borrow more debt.
Is financing a car good debt?
Given the price of automobiles today, whether or not you finance the purchase of one is kind of moot. Unless you’re a member of that fortunate 1%, you will probably have to finance it. This may not be totally good debt like a house, but a car is a utilitarian purchase. If you buy the right one, it should do a fairly good job of keeping its value. Financing a car can also be a good reason to get more debt if your current one just died. Or it is what you need to get to your job. On the other hand, if you were buying the car just because you wanted a newer model, that would be bad debt.
When is credit card debt too much debt?
One of the questions we get asked often here at National Debt Relief is how much credit card debt is too much credit card debt? The answer to this question is based on two things–how much you earn vs. how much you owe. We also consider how difficult is it for you to make just the minimum payments on your credit cards.
Debt To Income Ratio
One way to gauge whether or not you have too much debt is to calculate your debt to income ratio. This is the percentage of your gross income that you must use to pay your debts. Let’s suppose that you have a gross monthly income of $5.000 and recurring debts of $2,000 a month. In this case, your debt to income ratio would be 40%. If you were to find that your debt to income ratio was 50% or higher, that’s probably too much debt. You will soon find that your bills will get unmanageable.
A second and perhaps better way to decide if you have too much debt is how tough is it for you to make your minimum monthly credit card payments. If it’s a real struggle or worse yet, you just can’t make your minimum monthly payments then you’re clearly carrying more debt than you can afford.
Debt relief to the rescue
If you are in fact unable to make your minimum monthly payments, we can help. Here at National Debt Relief, we have counselors who will work with your creditors to reduce your balances as much as possible. Plus, you should be able to settle your debts within 24 to 48 months from the time you start your debt settlement plan.
Don’t let yourself be crushed by a huge pile of debt. Get a free quote, and let us help make your life easier and less stressful.