By Sean McQuay
Credit card debt is "bad debt," a sign of poor decision making and finances destined for trouble -- so we hear. But the truth is not so simple.
Credit card debt isn't bad. It's not good, either. It's just borrowed money. The ultimate value of any borrowed money depends on how much it helps you versus how much it costs, not what form it takes.
When I was young, my dad worked in construction and installed satellite dishes for a living. It provided my parents a good income for a time, but they soon realized it wasn't enough to sustain a growing family.
So in the early '90s, my dad went back to school to get his graduate degree in business. By that time, we were a family of five, and expenses were high. Pell Grants and student loans covered some basic living expenses but not all. During those years, my mom rotated the remaining household expenses across about nine low-interest credit cards. At one point, the credit card balances were as high as $60,000.
For my parents, taking on so much credit card debt in addition to student loans was stressful. My mom sometimes talks about how thinking about that debt gave her a constant stomachache. But in the long run, borrowing that money made financial sense. My dad was able to get a better-paying job, and my parents eventually paid down the credit card debt in full, paying next to no interest on the balances.
Was it bad debt? Some might argue it was, just because it was on credit cards, but I don't see it that way.
The better question: Is this debt really helping me?
Categorizing debts as bad or good just because they're associated with a certain financial product doesn't make much sense.
For example, the notion that all mortgages are good is absurd. Borrowing too much to get a house you can barely afford can do major damage to your savings. And if the value of your house drops later on, you could end up underwater on your mortgage -- that is, you might owe more than the house is worth.
Likewise, calling all credit card debt bad is simplistic. It assumes that all such debt comes with high interest rates and few benefits, and that's not always the case. Many cards come with zero-interest promotional periods and single-digit annual percentage rates, which other types of loans don't offer. You could use such a card to invest in something that could pay off in the future -- for example, opening a family business or making improvements on a house you're about to sell.
In my parents' case, they were able to carry up to $60,000 in credit card debt with a peak interest rate of 3.99% -- a much lower rate than they could have gotten on a personal loan. This debt, combined with the student loans, was an investment in my dad's education, which has paid for itself many times over.
Taking on credit card debt shouldn't be your go-to solution for every problem. If you can cover certain expenses by trimming spending elsewhere or dipping into your savings, those choices would likely be more cost-effective. But if you need to borrow money, using a credit card might be your best option.
Assigning a moral value to borrowed money isn't rational, but weighing the costs and benefits of debt is. Instead of asking ourselves whether our debt is good or bad, we should be asking, "Is this debt helping me or not?"
Minimize the cost of borrowing
For my parents, borrowing money during those early years was helpful. Because my dad wasn't working, he was able to go back to school full time, earn his degree and get a higher-paying job more quickly. Because my mom managed the credit cards so carefully, my parents paid very little in interest. They took on a lot of debt during those years, but not more than they needed.
If you're trying to get the most out of your borrowed money, it's important to put the debt to good use. But it's just as important to keep your borrowing costs down while you're in the red.
Interest rates: Look for 0% APR offers and keep track of when each promotional period ends. The Citi Diamond Preferred and the Citi Simplicity are excellent choices, both offering an industry-leading 21 months of 0% APR on purchases and balance transfers.
Fees: If you're transferring balances, keep in mind that most cards charge a 3% balance transfer fee. (The Chase Slate is a notable exception; it comes with a $0 introductory balance transfer fee for transactions made within the first 60 days of account opening.) Avoid making balance transfer after balance transfer if you want to pay fewer of these fees.
Balances: Borrow only what you need and keep your balances as far below your credit limit as possible to protect your credit. If you take out too much money, paying it down could take longer and cost you more in interest or balance-transfer fees.
Everyone has his or her own method of minimizing these costs. When my mom was juggling balances on nine credit cards at a time -- with "four or five waiting in the wings," as she put it -- she knew that even one late payment could cause her to lose a 0% APR offer and drive her interest rates up. So she wrote down the due dates, balances, interest rates and promotional APR details from all of her cards and kept the details in a binder. She was always careful to make payments weeks before the due date.
"I always made sure we made the minimum payments each month," my mom says. "The ones with higher interest rates I'd make higher payments on, if I could." A couple of months before an offer expired, she'd pay it off or transfer it to a different 0% APR offer she got in the mail to avoid interest payments.
"Mom and I would sit down at night sometimes and strategize, 'How are we going to do this? And how were we going to do this?" my dad says, talking about how they prioritized the debts. "It was a leap of faith sometimes."
I didn't realize it then, but when I graduated from college with about $12,000 in my own credit card debt, I was following the very same debt management strategies my parents had used years earlier. By paying careful attention to my cards' balances, promotional periods and due dates, I was able to avoid interest payments altogether.
'Respect the debt'
Credit card debt isn't bad, and it isn't good. It's just another device in your financial toolbox -- one that can help you in a big way, if you use it mindfully. Sometimes the benefits are worth the cost.
These days, most people can't do what my parents did with credit cards in the '90s. Underwriting standards for credit cards have tightened. Not everyone has the time or patience to manage several credit card accounts, as my mom did. But the important part is this: My parents took a calculated risk, and it paid off. They went in with a clear plan and borrowed carefully, and it worked out in their favor. To this day, they maintain excellent credit scores.
"You have to respect the debt," as my mom puts it. Borrow only when you need to, and borrow with purpose.
Sean McQuay is a credit cards expert at NerdWallet. A former strategist with Visa, McQuay now helps consumers use their credit cards more effectively. If you have a question about credit, shoot him an email at firstname.lastname@example.org. The answer might show up in a future column.
Photo courtesy of NerdWallet.