A Primer On Bad Debt: Credit Cards & Auto Loans

Welcome to the third and final week of our three-part series on debt. It’s a complex issue, and finding a way to repay debt is even more difficult, which is why we’re devoting so much time to it. We hope that the past weeks have served as a helpful primer on debt. We plan to continue to discuss issues like student loans, mortgages and more, so if you have more questions, send them over to shespends@gmail.com, or tweet them at us @she_spends. 

For the final part of our series on debt, we're discussing what's known as "bad debt." This, as previously discussed, includes credit card debt and car loans. These are included in the "bad debt" category because they involved money loaned on assets that tend to lose their value the moment they are purchased. 

Auto loans are tougher to navigate, because in most areas of the United States, you need a car to function. Because cars are so expensive, it's often necessary to take out a loan to pay for the car. There is a benefit to car loans. That is, paying your loan on time will increase your credit score. The only problem with these loans is that cars tend to lose their value over time. Once you pay off your loan, and potentially consider selling your car, it won't, like a house, garner you more money than you originally paid. Like with all loans, make sure you pay attention to the interest rate and how long you're expected to take to pay off the loan. For those interested in more, Credit Karma has an interesting page on car loans. And CNBC just posted an article on the subprime auto loan market (which should remind you just a little bit of the subprime home loan crisis in 2008).  

Credit cards, meanwhile, are an even more necessary evil. Using credit cards for purchases each month is a good way to build credit — as long as you pay your bill on time. However, if you don't, you'll quickly sink into credit card debt, which dings your credit score and comes with a high price tag. Interest rates on credit cards can be over 20% your bill, meaning if you don't pay it off each month, your credit card company will add an extra 20% or more onto the following month's bill. It's easy to see, then, why credit card debt can add up so quickly. 

One of the best ways to repay credit card debt is David Ramsey's snowball method. Basically, you start with your smallest debt and pay it off first. You get a nice hit of serotonin for accomplishing something, and some extra confidence to move to your second smallest piece of debt, and so on and so forth. It's important to prioritizing debt repayment after building a small emergency fund and before investing in stocks, which Ramsey highlights as a part of his debt repayment plan.

- Alicia McElhaney / She Spends Issue #6