So you need to spend money on your credit card to have a good credit score, but you shouldn't use it on everyday purchases like groceries, gas, or even electronics? What should the credit card be spent on then in order to keep a good credit score?

1: So long as you pay off the bill in a timely fashion and never make a late payment, it doesn't make any difference what you have used it for. 2: The warning about everyday purchases is to fence off these things that are likely to put you into debt that will be hard to get out of. But, so long as you are careful about the amount you owe, and make timely payments on it, you're OK. Just be aware that when you're going further into debt for the sake of your everyday needs, you may be spending beyond your means.

What are the causes of debt?

This may have been covered in the lesson, "Debt and its Causes." I recommend that you search out that lesson and give it a look.

My mom uses her credit card for everything, she said she does this because she gets rewards, pays them back, and doesn't pay interest.

That's great! If she is paying back the card before the interest starts, I'd call that 'Middle Debt' because she is using the card, but paying it back before any interest starts.

what are things that can help your credit score go up?

Renting an apartment and not trashing it can make your score go up. Getting a job and keeping it can make your score go up. Using a credit card and paying off your debt on time can make your score go up. Staying out of jail can make your score go up. Anything that leaves a data trail which reflects on your trustworthiness can make your score go up.

so what are you supposed to pay everyday expenses with?

One pays one's everyday expenses from one's everyday income.

what are the causes of debt

Wasn't that covered in the lesson? Maybe you need to listen or read again.

Main content

Course: Financial Literacy > Unit 5

Lesson 4: Debt

Debt and its causes

Google Classroom

In today's fast-changing world of money, knowing about debt, what causes it, and its impacts can help people control their money instead of letting money control them.

What is debt, and how does it grow?

Debt is the money that you owe to others. You might borrow money for different reasons, like buying a car, going to college, or paying for a vacation. When you borrow money, you usually have to pay it back with

Over time, your debt can grow because of interest, fees, and penalties. For example, if you take out a loan for

$ 5,000

with an annual interest rate of

5 %

, your total debt will grow by

$ 250

each year, even if you don't borrow any more money.

Good debt vs. bad debt: Understanding the difference

When you hear the word "debt," you might think it's always a bad thing, but that's not true! There are actually two types of debt: good debt and bad debt. Good debt is when you borrow money to invest in something valuable, like your future. Bad debt, on the other hand, is when you borrow money for things that lose value or don't help you grow financially.

Good debt: Investing in your future

Good debt is the kind that helps you achieve your dreams, improves your financial prospects, and adds value to your life. Generally, good debt involves borrowing money to invest in assets that will grow in value over time, generate income, or improve your finances.

An example of good debt is educational loans. If you borrow money to go to college or pay for training, you are investing in your education, which can lead to a better job and higher income. That's why people call this type of debt "good" – because it helps improve your financial situation in the long run.

Another example of good debt is borrowing money to buy a house. A home is an investment that can increase in value over time, so taking out a mortgage (a loan to buy a house) can be considered good debt too.

Bad debt: Weakening your financial stability

On the other hand, bad debt is when you borrow money for things that don't help you grow financially or lose value over time.

For example, if you use a credit card to buy a new TV or a trendy outfit, that's bad debt. These items lose value quickly, and you might end up paying interest on them for a long time. If you had to borrow

$ 1,000

for a new phone and paid

15 %

interest on it, you would actually end up paying more than

$ 1,000

for the phone, which isn't a smart financial decision.

Ultimately, the difference between good debt and bad debt lies in how the borrowed money is used and its potential to improve your financial future. Good debt can easily turn into bad debt if not managed carefully, and bad debt can be turned into good debt by being strategic about its use.

Check your understanding

Good debt or bad debt?

Read the scenario below and label it as an example of good debt or bad debt.

Tyriq takes out a student loan to go to college. He graduates with a degree in computer science and lands a high-paying job.

How debt affects your life

Debt can have a big impact on your financial health, well-being, and life goals. When you have a lot of debt, it can:

1. Reduce your cash flow, savings, and investments

When you're paying back debt, you have less money to spend on other things or save for the future.

2. Increase stress and anxiety

Worrying about debt can make you feel stressed, anxious, or even depressed.

3. Limit your choices and flexibility

Having debt can make it harder to change jobs, move to a new city, or take advantage of new opportunities.

Common causes and sources of debt

There are many reasons why people go into debt, including:

Medical bills

If you don't have health insurance or you have a high-deductible plan, an unexpected medical issue can be expensive.

Divorce

Legal fees and the costs of splitting up assets can put people in debt.

Job loss

Losing a job can disrupt your income and make it difficult to keep up with bills.

Student loans

College can be expensive, and many students take out loans to cover the costs.

Car loans and mortgages

Buying a car or a home often requires borrowing money.

Credit cards

People can fall into credit card debt if they're not careful about their spending and if they don't pay their bill in full each month.

Payday, title, and cash loans

These types of loans can be costly with high fees and interest rates.

Gambling

People can get into debt if they gamble more than they can afford to lose.

Warning signs of debt problems

If you notice any of these warning signs, you might have a debt problem:

Missing or making minimum payments: If you're only paying the minimum amount, it will take longer to pay off your debt and cost more in interest.
Relying on credit for everyday expenses: Using credit cards for things like groceries, gas, and bills can lead to more debt.
Borrowing from one source to pay another: Taking out a loan to pay off another loan is a sign that your debt is getting out of control.
Avoiding or ignoring bills and creditors: Not facing your debt can make the problem worse.
Feeling overwhelmed or hopeless: If you're constantly worried about debt and don't see a way out, it's important to seek help and make a plan.

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sou
Posted 10 months ago. Direct link to sou's post “So you need to spend mone...”
So you need to spend money on your credit card to have a good credit score, but you shouldn't use it on everyday purchases like groceries, gas, or even electronics?

What should the credit card be spent on then in order to keep a good credit score?
Button navigates to signup pageButton navigates to signup page
(14 votes)
Answer
- David Alexander
  Posted 10 months ago. Direct link to David Alexander's post “1: So long as you pay off...”
  1: So long as you pay off the bill in a timely fashion and never make a late payment, it doesn't make any difference what you have used it for.
  2: The warning about everyday purchases is to fence off these things that are likely to put you into debt that will be hard to get out of. But, so long as you are careful about the amount you owe, and make timely payments on it, you're OK. Just be aware that when you're going further into debt for the sake of your everyday needs, you may be spending beyond your means.
  Comment on David Alexander's post “1: So long as you pay off...”
  (17 votes)
2045687
Posted 10 months ago. Direct link to 2045687's post “What are the causes of de...”
What are the causes of debt?
Button navigates to signup pageComment on 2045687's post “What are the causes of de...”
(1 vote)
Answer
- David Alexander
  Posted 10 months ago. Direct link to David Alexander's post “This may have been covere...”
  This may have been covered in the lesson, "Debt and its Causes." I recommend that you search out that lesson and give it a look.
  Comment on David Alexander's post “This may have been covere...”
  (7 votes)
EllaSarai
Posted 5 months ago. Direct link to EllaSarai's post “My mom uses her credit ca...”
My mom uses her credit card for everything, she said she does this because she gets rewards, pays them back, and doesn't pay interest.
Button navigates to signup pageButton navigates to signup page
(1 vote)
Answer
- SnowyRawrGamer
  Posted 5 months ago. Direct link to SnowyRawrGamer's post “That's great! If she is p...”
  That's great! If she is paying back the card before the interest starts, I'd call that 'Middle Debt' because she is using the card, but paying it back before any interest starts.
  Button navigates to signup page
  (6 votes)
martin.calderonbarriosjr
Posted 4 months ago. Direct link to martin.calderonbarriosjr's post “what are things that can ...”
what are things that can help your credit score go up?
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(1 vote)
Answer
- David Alexander
  Posted 4 months ago. Direct link to David Alexander's post “Renting an apartment and ...”
  Renting an apartment and not trashing it can make your score go up. Getting a job and keeping it can make your score go up. Using a credit card and paying off your debt on time can make your score go up. Staying out of jail can make your score go up.
  Anything that leaves a data trail which reflects on your trustworthiness can make your score go up.
  Comment on David Alexander's post “Renting an apartment and ...”
  (4 votes)
jessejr102307
Posted 5 months ago. Direct link to jessejr102307's post “so what are you supposed ...”
so what are you supposed to pay everyday expenses with?
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(1 vote)
Answer
- David Alexander
  Posted 5 months ago. Direct link to David Alexander's post “One pays one's everyday e...”
  One pays one's everyday expenses from one's everyday income.
  Button navigates to signup page
  (2 votes)
essence.graves-mccullough
Posted 14 days ago. Direct link to essence.graves-mccullough's post “what is debt and how does...”
what is debt and how does it grow
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(1 vote)
Answer
- David Alexander
  Posted 14 days ago. Direct link to David Alexander's post “That information might we...”
  That information might well be included in the lesson. Why not read through it again.
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  (1 vote)
tonit1001
Posted 3 months ago. Direct link to tonit1001's post “what are the causes of de...”
what are the causes of debt
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- David Alexander
  Posted 3 months ago. Direct link to David Alexander's post “Wasn't that covered in th...”
  Wasn't that covered in the lesson? Maybe you need to listen or read again.
  Comment on David Alexander's post “Wasn't that covered in th...”
  (2 votes)