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CREDIT CARD DEBTS – Good or bad?
Here’ s the thing. Credit card debts are neither good nor bad. It’ s just money that one has borrowed. And assessing any borrowed money, rationally, to my mind, is all about weighing how much it costs vs. what benefits it gives you. Simple. Nothing more nothing less. So, I disagree with the created over-hype regarding credit card debts being bad debts. We need not put any moral judgment on any debt because of the form it takes. We should know that it’ s borrowed money and then do what we have to with it accordingly.
SO CAN CREDIT CARD DEBTS BE‘ GOOD’ TOO?
Yes, it most certainly can! There are examples of numerous families who have taken up huge credit card debts but managed it and rotated it all perfectly well to achieve what they wanted. For example, I know of one such young family where the earning man wanted to go back to studies and do full time MBA but already had a wife and a kid to take care of. He went back to
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his studies and his wife diligently rotated the household expenses across multiple low interest credit cards. Later on, my friend completed the degree and got a much higher paying job and was able to pay off the credit card debts in full. So you see, if you assess the cost and the benefits of this particular credit card debt, it was a good debt, wasn’ t‘ it? I refuse to look at it as a bad debt merely because the debt was on a credit card. Hence, there’ s no need to pay off your credit card debt in a hurry. But what you do need to analyze however, is what the debt is for … do you actually need it, is it for a long term benefit? As I mentioned, credit card debt is neither good or bad, the main focus should be on whether it is at all helping you or not.
THE WRONG QUESTION – Is the debt good or bad?
This moralistic question on debts according to me is fundamentally not correct. For example, mortgage is usually known as a good debt. But rationally speaking, all mortgages might not be good at all. If someone borrows too much for a house that he / she cannot really afford, it can be hugely detrimental to his savings. Moreover, if the price of the house drops for some reason, then you are gone. You would owe more than your house is
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worth. Similarly, tagging all credit card debts as bad and assuming that they all come with high interest rates and low benefits are being too simplistic. There are many cards which come with zero interest in promotional periods as well as single digit percentage rate per annum.
THE RIGHT QUESTION – Is the debt helping you?
This I feel is the right question to ask yourself when it comes to debts and while calculating which ones to pay off in a hurry. For example, a person might have taken a credit card debt as mentioned above for starting a family business, renovating your house that you would sell at a higher price, or like my friend, to get a higher academic degree, all of which would benefit him / her in future. There can be many cards which can give you a loan, the peak interest rates of which are lower than personal loan interest rates. So these factors need to be assessed in detail and the prime question of whether the debt is helping you or not is to be answered. If a credit card debt is helping me, then why not?
THE RIGHT OBJECTIVE – Keep your cost of borrowing to a minimum
Once you have asked the previous question, your
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sole purpose should be to minimize your cost of borrowing. It’ s crucial to put your debt to good use and get the most out of our borrowed money, credit card debt or otherwise. The three pointers that you should always keep in mind are:
Interest Rate: Look for zero percentage interest rate offers on promotional periods and keep a track regarding when the promotional period ends.
Fees: While transferring funds usually there is a fees that is charged. Keep note of these and the period of time duration or no of transfers, etc factors that the fee can depend on.
Balances: Needless to say keep your credit card debt balance as low as possible and borrow only that you need
To conclude it can be said that everyone has his / her own style or strategy to taking on and paying off debt. Make sure the minimum balances are paid each month and make higher payments on the cards having higher interest rates. Most importantly, respect the credit card debt – borrow only when you have purpose and only when you need to and if it benefits you and you can work out a minimum cost strategy to it, there is no need to hurry and pay it off.
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