Is it a bad idea to have a water candle in my house?

Solution 1:

Yes. Water Candles increase the monster spawn rate by 33% and increase the maximum number of spawned monsters by 50% when it's placed near you, or you're actively holding it. Merely having it in your inventory doesn't do anything.

The Water Candle was broken before the 1.0.4 update, though; its effect was instead attributed to the Band of Regeneration. This is no longer the case.

Solution 2:

If there are enough NPCs in your base, having a water candle in it is actually a good idea. NPCs prevent enemies from spawning, so the water candle will increase the spawn rate of critters such as fireflies, Butterflies, Squirrels, and Rabbits.

The only time it is a bad idea to have a water candle in your base is during Blood Moons and Solar Eclipses, where it actually will affect the spawn rate of enemies. It does not affect the Pumpkin Moon, Frost Moon, Pirate Invasion, or Goblin Invasion spawn rates. I would note, though, that once you have good enough gear, it might be advantageous to have higher spawn rates during these events to increase the chances of getting a drop or to get more money.