Credit card debt is the amount of money you owe to a credit card company that you do not pay off in full each month.
And it’s pretty much always bad debt because it’s usually used to purchase things that won’t turn a profit (ex. clothes, furniture, entertainment, dining out etc.).
On top of that, it’s one of the highest-interest methods of borrowing money. Credit card interest rates can be as high as 30% — or more! Whereas at the time of this writing lines of credit can be had from the bank for less than 5% if you have good credit.
The scary thing is that according to an American Bankers Association May 2016 report, 42.1% of American credit card accounts have balances that are not paid off in full each month.
And it gets more scary if we ignore the accounts that aren’t being used, because then it’s just over 58.6% of active accounts are not paid off each month, compared to 49.4% that are.
So I ask you this.
Would you rather be one of the minority that saves big bucks on interest charges by paying off your credit card in full each month?
Or would you rather follow the herd off a financial cliff, joining the ones that don’t pay theirs off every month?
Obviously the ideal situation is for you avoid going over that cliff to begin with.
But keep in mind that worst case, even if you’ve already gone over that cliff, you can fix it. That’s what this book is all about, after all. Remember that, okay?
“Money often costs too much.” Ralph Waldo Emerson
Think about this for a moment.
If you carry a $10,000 balance on a credit card with an interest rate of 12% you’re paying $1200 per year in interest. If the interest rate is 30%, you’re paying $3000 per year in interest.
Now if that’s your situation, don’t let the knowledge of how much money is being wasted on interest discourage you.
Instead, use this knowledge to light a fire under you that fuels your determination to put an end to the madness now.
You can pay it off.
You really can.
You just have to start, and take it one step at a time.
Other kinds of bad debt
As you can imagine, loans used to buy things like furniture, a vehicle, vacations and electronics all fall into the bad debt category, should be considered urgent, and should be paid off as soon as possible. All of these things go down in value with time, and aren’t likely to generate income for you that will offset what you’re paying in interest on their loans.
Your goal for bad debt
Your number one goal for bad debt is to get rid of it as soon as humanly possible. This kind of debt is the equivalent of setting your money on fire every single day (what a waste!), and it’s needlessly increasing the financial risk you’re exposing yourself to if you can’t afford to pay it off right now.
- It’s time for a reality check. Because you can’t fix what you don’t know is broke.
Right now, I want you to go through every credit card, every bank statement, every loan statement, every single bill you have, and find out how much debt you have.
Don’t let it depress you. Don’t let it get you down
And although it may not feel this way, you’re tougher than that, starting now. You’re going to be an action taker, a doer. And you’re going to fix this.
And if by some chance it’s late at night…
… and you worry that doing this now will keep you awake all night, go to your calendar and set aside some time to do this within the next 24 hours. I’m serious. This is immensely important if you want to get on the road to wealth — you need to create the time to do this.
- Create a chart so the info is easy to read and well-organized. For every single one of your debts, write down the following information:
- what the debt is for (ex. Car loan, credit card, furniture loan etc.)
- who you owe it to (ex. MasterCard, Bank of America line of credit, Ford dealership car loan etc.)
- the interest rate
- the minimum payment due each month
- the remaining balance owing
- classify it as good or bad debt based on the three criteria discussed in this chapter.
To make this job faster and easier, I’ve created a tool to track it all for you: The Debt Destroyer. If you’d like to get your hands on it, go here to get it.
- Whatever you do, don’t freak out when you see the totals. Give yourself a pat on the back for keeping it real and facing your debt head on. This is the first step to destroying it once and for all.
- Put this info aside for now. You’ll find out how to handle it in the upcoming chapters.
I’m pretty hard core when it comes to getting rid of bad debt. That’s why we paid off our home in under five years. That’s why aside from the first vehicle I ever bought right after graduating with my university degree (which I should have saved up to buy without a loan, mind you), every single vehicle I’ve ever bought has been paid for in cash. And I avoid credit card debt like the plague.
Look, if you can’t sell everything and pay it all off right this minute, your bad debt is a massive freaking emergency and needs to be paid off as soon as humanly possible.
And if you could theoretically sell everything you own to pay off your bad debts, but it would cause you undue hardship to do so, it’s merely a regular emergency. But seriously, do you really want to live with a potential financial emergency every single day? I think not.
Look, if you have bad debts, you need to get rid of them asap. Period. And that will open up a world of possibilities for growing your wealth and creating a prosperous financial future.
Next, we’re going to talk about mortgages and whether it’s good or bad debt. It’s typically one of the largest debts that any of us ever have, so it’s important to stick it in the right category so you know what to do about it.
P.S. If you’re renting, you still need to read this chapter. Because the conclusions drawn about how much of a monthly mortgage payment is affordable also applies to monthly rent.