Bad Debt Happens to Good People

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A recent survey revealed that 59% of American credit card holders—110 million Americans—were in credit card debt before COVID-19. And it wasn’t frivolous spending. Twenty-six percent said that day-to-day expenses like groceries, child care, or utility payments were the biggest factors in their debt balances.

Not All Debt Is Bad

Good debt is generally considered low-interest debt that helps you increase your net worth, ultimately helping you improve your financial position at a reasonable cost. This could include student loan debt, a home mortgage, a vehicle loan, or a small business loan.

But bad debt is bad, expensive, and usually unnecessary. It puts a strain on your financial situation, especially when used to finance discretionary (avoidable) expenses like vacations, costly electronics, or fancy dining experiences. Even good debt with high or variable interest rates that isn’t managed appropriately can turn into bad debt.

However, Not All Bad Debt Is Intentional

Let’s say you had to use your credit card to get you through the month of child care, intending to pay the credit card balance in full. Out of nowhere comes COVID-19, and your situation changes. You find yourself unable to pay the balance off in full, and your temporary debt quickly turns into expensive, bad debt.

An unexpected turn of events like COVID-19 is what makes an individual’s financial situation unpredictable. This unpredictability is the primary reason financial wellness services exist. It is imperative to be prepared, to have a plan, and to have resources to fall back on should something unexpected like COVID-19 happen.

The term “rainy-day fund” is appropriately named because when it rains, it pours. Without financial resources and services to help your employees navigate challenging situations, good debt can turn bad. And good people with good intentions may turn to bad debt when they feel there isn’t a better alternative. Continue reading here…

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Source: HR Daily Advisor

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