Why Credit Card Debt Isn't Necessarily Bad Debt

September 29, 2016

If there's one thing people love, it's their credit cards. A 2015 survey conducted by Harris Poll and NerdWallet showed that the average U.S. household carries $15,355 in credit card debt. Certainly, going into debt for shoes and the latest electronic gadgets can't be good for your household finances, but there are times when having some credit card debt may be better than having no debt at all.

 

Boost Your Credit Rating

A key component to a good credit score is the credit utilization rate — the amount of debt you carry compared to your credit limit. To find out how credit utilization affects credit scores, Credit Karma surveyed 14 million members in 2014. The data showed a peak in scores among those who were using between 1 and 10 percent of their credit card limits. These people had an average credit score of 753. 

Those who used a bit more of their limit — up to 20 percent — had an average score of 715. Above 20 percent, scores declined. However, those who had no credit card debt at all had an average score of only 692, about the same as those using 30 percent of their available credit card limits.

 

Avoid Fees and Penalties

In some cases, putting debt on your credit card makes the most sense financially, when compared to other options — like owing money to the government. If the IRS is about to impose a tax lien on your property due to unpaid taxes, or if you have negotiated a monthly installment plan for your tax debt, it may be cheaper to pay by credit card. Of course, this depends on your credit card interest rate compared to the interest, fees and penalties you may have to pay to the government.

 

Start a Business

Borrowing from friends and relatives, and putting expenses on a credit card are two of the most common sources of funding for most startups with fewer than five employees. If you're planning on starting your own business, your credit card may be the only thing between merely having a slow first quarter or having to close your doors forever. Needless to say, borrowing money to make money doesn't come without risk, so make sure you have a sound business plan and a plan for success before swiping your card for those office supplies.

 

Invest in Yourself

If you're going back to college to finish your degree or taking an online course to get a certification for a promotion, going into debt to pay for tuition and to buy books may be a reasonable sacrifice.  As with any debt, however, it's vital that you have a feasible plan to pay it off, whether you get that promotion or not. You should also look at alternatives, like a personal loan or a federal student loan, which have more modest interest rates than the typical credit card

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