Bad debts are those that drag us closer to the financial doom and bankruptcy. There is no financial reason why these debts are required and they often happen due to impulse buying. Credit cards with high interest rate are among them and we should stay away from them if the interest rate is higher than 10 percent. Some credit cards can also be as high as 25 percent. Even if we are able to pay off the debt in the same month, it is still a bad debt if we don’t really need to spend a huge amount of money for consumption purposes. However, things can be even worse when we are late in paying the credit card debts. Late payments can be really huge and if things are bad enough, we need to negotiate with the credit card issuer so we will be able to pay less. If we can’t handle the temptation, it is better to leave our card at home, so we won’t need to use it. The card should be used only during emergency situations.
Car loan with high interest rate can also be seen as bad debt. Cars are essential if we want to go places, including office. However, it will become a bad debt, if we don’t get the best interest rate. The dealer gets a commission from our financing and it’s in our best interest if we get the lowest rate. The dealer could be willing to negotiate if we are prepared to walk away. Even one percent difference can make a huge difference in the total cost of financing. As an example, for a 60-month of loan, a $30,000 car loan will require us nearly extra $1000 for each one percent of difference in interest rate. If we can’t get the best interest rate, we should look elsewhere until we find the one that can provide us with the best results. If possible, we should make sure that the period of the loan is made as short as possible, so we don’t need to pay as much. We shouldn’t fall into common trick like the seemingly low monthly payment, but the loan period is actually 5 years or longer.
Another form of bad debt is when we actually can pay it off immediately. We shouldn’t keep debt around if we are actually able to pay it off. Interest rate causes us to bleed money and make us poorer. We should stop paying interest and pay down the debt as soon as possible. Interest is like a hole in the bottom of our coin pouch. Some coins will fall through the hole regularly as we move around. Although the small hole is barely noticeable, it will contribute in making our pouch empty. This could happen with credit cards and other small loans that we could take care of immediately. Any kind of interest rate should be avoided whenever possible and we should be able to make the best use of our fund.