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Contrary to popular belief, not all debt is harmful. In fact, certain types of debt can play a valuable role in building wealth or generating future income, which is why they’re referred to as good debt. For example, a loan used to launch a business becomes a reliable source of revenue. Even a credit card cash advance, if managed responsibly, can be used for positive purposes, for example, to join a training program or learn a new employable skill, both strategic investments that support long-term financial growth.
However, debt becomes problematic when it’s taken on for short-term gratification or used to buy things that quickly lose value. This is commonly known as bad debt, which often comes with high interest rates and can spiral out of control if not managed carefully. People may fall into bad debt for various reasons, such as poor spending habits, limited financial literacy, or simply living beyond their means. Understanding how these patterns form is the first step in avoiding the financial strain that bad debt can cause.
Worried that you might be slipping into bad debt? Here are some red flags to watch out for so you can take control of your finances before things get out of hand.
1. You’re Frequently Using Your Credit Card for Unnecessary Expenses
Credit cards can be a powerful financial tool when used responsibly, offering convenience and perks like rewards or cashback. For example, the Landers Cashback Everywhere Credit Card from Maya Bank gives you up to 5% cashback at Landers, 2% on dining, and 1% on other qualified purchases.* This means every transaction helps you earn cashback that can lower your grocery expenses and ultimately save you money.
However, if you often use your credit card for non-essential or impulsive purchases, such as buying gadgets or luxury goods you don’t really need, or splurging on sales that don’t add value to your life, it could quickly lead to accumulating bad debt. One way to manage this is by using your credit card’s built-in spending controls. If you’re a Landers Cashback Everywhere Credit Card user, you can set a lower daily spending limit through the Maya app to help curb impulse purchases. You also have the option to turn off online payments entirely, making it easier to resist the temptation of excessive online shopping.
Remember, using your credit card isn’t inherently succumbing to bad debt. It only becomes one when you charge unnecessary expenses or make purchases you know you can’t pay off on time.
2. You’re Only Paying the Minimum Balance on Credit Cards or Loans
Paying only the minimum amount due each month might seem convenient, but most of that payment typically goes toward interest rather than reducing your actual debt. Over time, this causes the total amount you owe to grow and extends the period you remain in debt.
This is especially important to keep in mind if you’ve recently made a cash advance credit card transaction. Since cash advances usually carry higher interest rates than regular purchases, failing to pay them off quickly can result in rapidly accumulating interest charges. By paying more than the minimum balance on your debts, you can prevent this buildup and keep your debt manageable before it escalates into an overwhelming balance.
3. You’re Unaware of Your Total Debt
Not keeping track of how much you owe can lead to a risky situation where debts accumulate beyond your ability to repay. If you avoid checking your statements or don’t have a clear picture of all your loans, you risk falling deeper into bad debt without even realizing it.
To prevent this, make it a habit to regularly monitor your expenses and billing statements. Fortunately, many banks and credit cards now offer companion apps that simplify this process. For example, Landers Cashback Everywhere Credit Card holders can use the Maya app to conveniently track real-time transactions and view their balance statements. This helps them stay on top of their finances and manage repayments more effectively, rather than feeling lost about where to start tackling their debt.
4. You’re Taking New Loans to Pay Off Existing Debts
If you find yourself borrowing money just to pay off other debts, you might be caught in a debt cycle. While it may offer temporary relief, taking on new loans to cover existing ones often leads to even higher interest costs and makes it harder to become debt-free.
Instead, reassess your budget and spending habits to identify where you can cut back. Also consider exploring more manageable repayment options like consolidating your debts under a single loan with lower interest. Taking proactive steps like these will help you regain control of your finances and avoid sinking deeper into bad debt.
5. You’re Frequently Late or Missing Payments
Missing due dates can lead to penalties, higher interest charges, and damage to your credit reputation. It may also indicate that your cash flow isn’t enough to comfortably cover your obligations. To avoid this, try setting reminders, whether it’s a calendar alert on your phone or a physical note in a place you frequently check, to make sure you never miss a payment. Some credit cards, like the Landers Cashback Everywhere Credit Card, even let you choose your billing date upon application. This flexibility allows you to align your due date with your payday, making it easier to stay on top of your bills and avoid falling behind.
6. Your Debt Is Preventing You from Saving or Investing
If your monthly income goes mostly toward paying off debts, leaving little or nothing for emergency savings or investments, your finances may be out of balance. This is often the case when people put off starting savings accounts or other financial goals because all their extra money is tied up in paying installments or debt repayments.
To make your finances more manageable, review your spending habits and identify even small areas where you can cut back to free up money for saving. You can also take advantage of your credit card’s rewards programs to reduce some expenses, allowing you to set aside more funds for saving or investing. For instance, by using your Landers Cashback Everywhere Credit Card to maximize cashback on every purchase, you can make grocery trips more affordable and redirect the savings toward building your emergency fund.
Recognizing the warning signs of bad debt early can make all the difference in maintaining your financial health and peace of mind. It’s not just about avoiding debt altogether, but managing it wisely so it works for you rather than against you. By taking note of the red flags above, you empower yourself to make smarter financial decisions and build a more secure future.
*Transactions that don’t qualify include: cash in, cash advance, quasi cash purchases, casinos and gambling, fuel, supermarket, pharmaceuticals, utilities, telco, and government.
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