What is Bad Debt!

Bad debt is debt used to pay for consumable purchases such as vacations, food, clothes, and gasoline.

Bad debt is debt used to pay for consumable purchases such as vacations, food, clothes, and gasoline, on which you proceed to pay only the minimum each month rather than paying the card balance in full each month. There may always be times in our lives when we can't pay that balance in full each month, but that should be the exception instead of the norm.

If you charge those new school clothes at Wal-Mart, the credit card company reimburses Wal-Mart for your purchases, and that amount goes on your bill. For the privilege of allowing the merchant, in this case Wal-Mart, to accept your credit card, the merchant must also pay a fee to the credit card company, usually 3 to 4 percent of the purchase price plus an annual fee. Furthermore, you normally have a grace period before you must pay the credit card company for those new school clothes. It is usually about 25 days, and if the balance is not paid in full, the interest begins to accrue.

These are not the only fee credit card companies can charge. There are late fees, which are usually estimated at 2 percent of your outstanding balance. The average late fee in 1998, according to Card web. com, was $21.82. And being late can cause your interest rate to increase to as high as 27 percent. If you use your card to take a cash advance at an ATM machine, the interest rate may be higher, and the clock starts to tick immediately because cash advances usually don't have a grace period. So the credit card company makes money coming and going, most of it from the consumer.