What is Credit Card Debt?

Credit card debt is described by Wikipedia as an “example of unsecured consumer debt accessed through credit cards.”  While this is certainly true, it does not tell the whole story of what credit card debt is and what the results of credit card debt are.

When you or I purchase any item or service with a credit card, we incur a debt to the Credit Card Company or bank, which we are obligated to pay back along with interest that has been incurred.  These debts and interest charges accumulate with each transaction and should repayment not be made timeously, these debts will incur additional charges such as fees and penalties.

 

Credit Card Debt

While in most countries the issue and use of credit cards are governed by laws that generally restrict the interest charges, fees and penalties that may be charged, it is here where the majority of the problems lie.  A default occurs when you are either unable to pay the outstanding minimum monthly repayment, unable to pay any amount or pay the minimum amount due late.  With interest rates ranging anywhere up to 25% and the compound effects of interest and fees on top of more interest and fees, these additional costs can, and in fact do, become overwhelming.

While most countries did away with debtors’ prison many years ago, the consequences of credit card debt can be equally as devastating and embarrassing and it has enormous future effects on more than just your credit worthiness.  Statistics from countries around the world show that credit card debt is out of control and there seems to be no end in sight.

According to research the average credit card debt per American household was in excess of $14 000 in 2010.  This average is similar in most western countries and as tough financial conditions continue to bite further, more consumers begin to default on their credit card debt.

Current credit card statistics also show that in general, credit card debt is up, while actual usage is down.  This is due to the additional fees and penalties incur by defaulting and in fact these additional charges amounted to approximately $20.5 billion in 2009.  Associated Press reported that the American credit card default rate was at 11,37% in March 2010, which is incredible, but understandable.

Credit card debt could be summarized as the unpaid balances owed by you on all of your credit cards, including all of the interest, fees and penalties, which if not managed carefully could get out of control and indeed does, with disastrous consequences.

Does this then mean that credit cards are bad?

Essentially, No!  It is the abuse of credit cards that is the problem.  As a financial advisor for many years and as someone who struggled to overcome a mountain of credit card debt, I have never met a person who, following a sound financial plan and budget get into credit card debt or any serious financial trouble.

Many people carry credit cards for safety reasons and while this is potentially a good thing, the downside is that most people find it easier to spend on these credit cards than they do to pay cash.  This gives room for impulse buying and instant gratification spending which together account for over 60% of all credit card purchases and are the biggest causes of credit card debt and default.

 

Therefore if you have a credit card ensure that you use it sparingly and wisely.  You should be in a position to settle any outstanding balance at the end of every month.  It is the surest way to ensure that you never have an issue with credit card debt.

Budget, Credit Cards, Debt, Debt Stress, Financial Freedom, Financial Goals, Financial Peace, Financial Planning, Money, Saving Money