What are the worst types of debt to have?

One thing that personal finance writers focus on a lot is debt – and there’s a good reason for that! Debt can make your life very stressful and challenge your ability to achieve your financial dreams. We’ll explain why the following types of debt are the worst type of debt to have:

Credit card debt.
Payday loans.
Vacation debt.

Credit Card Debt

Credit card debt is one of the worst types of have for two reasons:

The interest rates are super high! Depending on your credit card, you may be looking at interest rates of twenty percent or more – which adds up quickly. And since credit cards let you pay the minimum balance each month, they give you the illusion you’ve got your debt under control when you don’t.
A lot of credit card debt is debt that could have been avoided. While you may put essentials such as your groceries on a credit card, you will likely put a lot of unnecessary items on it, like impulse purchases and meals out you couldn’t afford.

Payday Loans

Payday loans can seem very attractive when you’re in a bind, but they charge even higher interest rates than credit cards and can take months to pay off.

Here’s an example of why a payday loan is a bad debt to have:

You go to a payday lender to borrow 500 dollars.
Your payday loan will cost you $17 per $100 that you borrow. This is the same as an annual interest rate of 442%!
You will have to pay interest as long as you owe any money on the loan, which can add up.
You may have to pay additional fees on top of interest if you can’t pay your loan back in the agreed-upon period.

Payday loans are a type of debt you should avoid – even overdraft protection on a bank account or a cash advance on a credit card are cheaper!

Vacation Debt

Now that travel restrictions are easing; you may consider taking a vacation. That’s a great idea if you’ve got the money saved for it!

If, however, you haven’t saved up for a vacation, then taking on debt to pay for one is a bad idea. There are a few reasons for this:

Unlike a car loan or a mortgage, you have nothing tangible as a result of taking on vacation debt.
You’re likely to put your vacation on a credit card, which charges high-interest rates and can take months to pay off.
Any good memories you have of your trip will be soured by the fact you’ll be paying off the cost of it for several months. If you save up before you go, this won’t happen.