Credit card (or consumer) debt is usually considered
bad debt, because:
- It's very expensive to carry due to the high interest applied on the balance you owe; interests compound each month and before you know it, it balloons out of control.
- It does not create any equity when you pay it off (unlike a mortgage). Once it's paid, well, it's paid - and you have nothing else to show for it. Unlike a mortgage, where at the end you have the property under your name.
- Interests are not tax deductible (unlike a mortgage).
- It can hurt your credit score if you have too much of it.
That's enough reasons to try and get rid of it ASAP.
Regarding your question, the rule of thumb is to
figure out which one between your savings or your credit card debt grows faster. And I'd bet the house that your consumer debt does!
Today, interests rates on savings accounts and CDs are really lousy - you'll be lucky if you find an FDIC-insured product yielding more than 2%. On the other hand, most credit card debt
increases in the double digits every month, i.e. sometimes more than 10 times faster than your savings grow!
Imagine saving $100 each month at 2%. After 1 year, you have $1,213 making you $13 in interest. Imagine at the same time being $100 more in debt each month for a year. If you use a credit card with a 18% APR for this expenditure, you'll owe $1,324 to the credit card company.
In this situation, even if you save, you are poorer by $111. I think you get the picture.
