What Is Credit Card Debt?
Credit card debt is a type of unsecured liability that is incurred through revolving credit card loans. Borrowers can accumulate credit card debt by opening numerous credit card accounts with varying terms and credit limits. All of a borrower’s credit card accounts will be reported and tracked by credit bureaus. The majority of outstanding debt on a borrower’s credit report is typically credit card debt, since these accounts are revolving and remain open indefinitely.
Key Takeaways
- While useful for making purchases over time, credit card debt does carry some of the industry’s highest interest rates.
- Credit card debt typically accounts for a significant portion of credit utilization on a borrower’s credit profile.
- Paying down substantial portions of outstanding credit card debt is one of the best ways to rapidly improve your credit score.
Understanding Credit Card Debt
Generally, credit card debt refers to the accumulated outstanding balances that many borrowers carry over from month to month. Credit card debt can be useful for borrowers seeking to make purchases with deferred payments over time. This type of debt does carry some of the industry’s highest interest rates. However, credit card borrowers do have the option to pay off their balances each month to save on interest over the long term.
Benefits of Credit Card Debt
Credit cards are one of the most popular forms of revolving credit and offer numerous benefits for borrowers. Credit cards are issued with revolving credit limits that borrowers can utilize as needed. Payments are typically much lower than a standard non-revolving loan. Users also have the option to pay off balances to avoid high-interest costs. Additionally, most credit cards come with reward incentives such as cash back or points that can be used toward future purchases or even to pay down outstanding balances.
Credit Bureau Reporting and Analysis: What to Know
Lenders report credit card debt level balances to credit bureaus each month along with a borrower’s relevant credit activity. Thus, credit cards can be an excellent way for borrowers to build out a favorable credit profile over time. However, negative activity such as delinquent payments, high balances, and a high number of hard inquiries in a short period of time can also lead to problems for credit card borrowers.
Credit card debt is highly influential in determining a borrower’s credit score since it will typically account for a significant portion of credit utilization on a borrower’s credit profile. Credit bureaus track each individual credit account by itemized trade lines on a credit report. The aggregation of outstanding credit card debt from these trade lines is the borrower’s total credit card debt, which is used by credit bureaus to calculate theircredit utilization ratio by dividing it by the aggregate amount of credit limits of all credit cards owned by the borrower. Credit card utilization is an essential component of a borrower’scredit score.
Credit card debt is a major factor in determining a borrower’s credit score.
Lenders will also report a borrower’s payment activity to credit bureaus each month. Delinquent payments detract from a borrower’s credit score while on-time payments help their credit score. Maintaining on-time payments helps a borrower to achieve a higher credit score and qualify for better lending terms.
Since credit card utilization is also a factor in a borrower’s credit score, paying down substantial portions of outstanding credit card debt is one of the best ways a borrower can rapidly improve their credit score. Keeping credit card balances low will also help a borrower to maintain a good credit score.
FAQs
Essentially, you're charged interest on your interest. As a result, your credit card balance can continue to grow, even if you don't make additional purchases. Only paying the minimum each month means you are carrying the debt from month to month, and your debt increases even further as you accumulate interest charges.
What is credit card debt and how does it work? ›
Generally, credit card debt refers to the accumulated outstanding balances that many borrowers carry over from month to month. Credit card debt can be useful for borrowers seeking to make purchases with deferred payments over time. This type of debt does carry some of the industry's highest interest rates.
Why is a credit card a type of debt in EverFi? ›
Why is a credit card a type of debt? Credit cards are only used in stores and not between friends. Credit card companies charge a small fee to use them. Using a credit card is borrowing money that needs to be paid back later.
What is the fastest way to get out of credit card debt? ›
Having a concrete repayment goal and strategy will help keep you — and your credit card debt — in check.
- Pay more than minimums. ...
- Take the debt snowball approach. ...
- Use the debt avalanche method. ...
- Automate your payments. ...
- Consider a personal loan. ...
- Think about a debt management plan. ...
- Decide if you want to pursue debt settlement.
Key Takeaways
There aren't any free government debt relief programs for credit card or personal loan debt other than bankruptcy. Many types of government debt relief exist in the form of grants and low-interest loans for specific purposes.
What is debt and how does it work? ›
Debt is money you owe a person or a business. It's when you've borrowed money you'll need to pay back. Usually, people borrow money when they don't have enough to pay for something they want or need. If you do borrow money, it's best to have a plan for how you'll pay it back.
How does credit card debt affect your life? ›
If you only make minimum payments on your debt, you will pay a lot in interest and it can take years to pay off your balance. There could be negative physical and emotional effects. Debt has been linked to various mental and physical health ailments, including anxiety, depression and high blood pressure.
How long will it take to pay off 10 000 in credit card debt? ›
Examples of How Long It Will Take to Pay Off $10,000 in Debt
| Debt | Monthly Payment | Payoff Time |
|---|
| $10,000 | $300 | 45 months |
| $10,000 | $400 | 31 months |
| $10,000 | $500 | 24 months |
| $10,000 | $1,000 | 11 months |
How to Get Rid of $30k in Credit Card Debt
- Make a list of all your credit card debts.
- Make a budget.
- Create a strategy to pay down debt.
- Pay more than your minimum payment whenever possible.
- Set goals and timeline for repayment.
- Consolidate your debt.
- Implement a debt management plan.
The most straightforward way to have your credit card debt legally forgiven is to file for bankruptcy. When you file for Chapter 7 bankruptcy, commonly known as liquidation bankruptcy, your assets above certain exempt amounts are sold off to repay as much of your debt as possible.
These options could help you tackle what you owe without an additional loan:
- Transfer your balance to a new card with a promotional rate.
- Try to negotiate with your creditors.
- Enroll in a debt management plan.
- Take advantage of credit card hardship programs.
- Use a debt settlement program.
The government does not offer free money or grants to people for personal needs.
Can credit card debt be forgiven? ›
Credit card debt
While forgiveness typically isn't an option, you can pursue debt relief options such as: Bankruptcy: You can file for bankruptcy, which in certain cases includes full or partial debt forgiveness.
What happens if you don't pay credit card debt? ›
You Can Incur a Penalty APR. Your Account May Be Sent to Collections. Your Credit Score May Take a Hit. Your Creditor May File Suit Against You.
What happens to unpaid credit card debt after 7 years? ›
Although the unpaid debt will go on your credit report and have a negative impact on your score, the good news is that it won't last forever. After seven years, unpaid credit card debt falls off your credit report. The debt doesn't vanish completely, but it'll no longer impact your credit score.
How do people end up in credit card debt? ›
Spending more than you make.
Overspending is one of the fastest ways to build a debt load that doesn't match your income. Consider your purchases carefully and do your best to avoid impulse spending.
Do you ever have to pay back credit card debt? ›
You'll need to repay at least the monthly minimum repayment or you could lose the deal. When the 0% periods on these cards end, you'll pay expensive interest on anything you still owe. See Help if you're struggling with debt for other ways to tackle your debts, including free debt advice.
