(MoneyHippo.com) – When you hear the word debt, you might envision a drain on your bank account month after month. In truth, some obligations can help grow wealth, although carrying the wrong kind of debt can hinder financial progress for the foreseeable future. Credit card balances with high interest rates can trap you in a cycle that’s hard to escape.
The problem with credit cards and any other obligation without an asset attached is that nothing on the other side of the commitment is gaining equity. For instance, a house attached to a mortgage will likely appreciate over time. So, as you pay off the liability, your home is probably growing in value, giving you equity and adding to your bottom-line wealth. That’s an example of good debt.
In contrast, credit cards don’t have an asset counterweight to justify the obligation. Also, paying the minimum balance on your charge card likely doesn’t even cover the interest, so whatever you bought costs much more than if you had saved to buy the item outright. Instead of representing an investment, the obligation strains your long-term budget.
Paying the balance monthly is the only way to use a charge card responsibly. Be sure you have the money beforehand to cover any purchases. By following that strategy, you can build your credit score, avoid the trappings of bad debt, and take advantage of any benefits the credit card company offers.
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