Credit card debt is easier to accumulate than most other types of debt since credit cards are readily available for qualified applicants and are accepted for almost any purchase around the world. Understanding the truths and dangers about credit card debt can help prevent you from ending up wishing you did.
It's a Burden
Any credit card debt you carry from one month to the next is bad because the interest eats into your funds. Credit cards have no positive impact on your savings, are not any form of investment, and can only bind you in a high-interest trap if you end up with any monthly balance at all. You may intend to pay the bill off in full as soon as you receive it, but sooner or later you very likely will charge up more than you can handle in one month, and the ball starts rolling — downhill. According to CNN's Dan Kadlec, the 30-percent rule is a good place to start. Any credit card balance you carry should be less than 30 percent of the total limit so that your credit score and your ability to pay it off in full is not diminished.
Check your own card's terms concerning late payments, but often the minimum payment as listed on your monthly statement can be paid without penalty for up to 21 days after the due date. If you've got a good payment record with the credit card company, you might have your courtesy period extended as far as 60 days. Once the 60-day point is passed, the company will notify all three of the national credit bureaus — Experian, Transunion and Equifax — and a delinquency will be noted on your credit report. If you still do not pay your debt by the time 90 days pass, you can expect phone calls, an account closure, and contact from a collection agency.
For the year 2012, families in the United States with one or more credit cards will carry an average of about $16,000 in debt on those cards, according to CNN's "Money 101: Lessons on Controlling Debt." TIME magazine highlights the troubles of America's student population, which fares even worse with over 60 percent of undergraduates and more than 85 percent of graduate students carry a balance from month to month. When you factor in the amount of interest being charged each consumer -- in the neighborhood of 15 percent on average, according to CNN -- the debt being accumulated is quite large. Read the terms and conditions of your credit card accounts to determine which ones have the highest interest rates, and begin paying down those first to lessen the damage to your bottom line.
Never Pay Minimums
Minimum payments are designed to cover little more than the interest due on your credit card accounts, so the result is lots of profit for the lender and lots of unnecessary expense for you. If you pay the minimum on an account with a $5,000 balance and an interest rate of 15 percent, it will take you nearly 22 years and almost $6,000 in interest to get to a zero balance, without making a single purchase the entire time.
Beware Debt Settlement Companies
If your credit card debt becomes more than you can handle, work directly with the credit card companies to pay it down. Explain your financial situation and come to a minimum payment agreement that will not incur any further penalties. Avoid using debt relief or consolidation services. Although some may be legitimate, many will ask for payment up front before starting to work on your case, and in the end will only reach the same agreement with your creditors that you could have done on your own for free. There is no promise that they will do anything at all besides collect your payments. Check with your local attorney general's office for a list of legitimate debt services near you.
Credit vs Cash
Credit cards are almost guaranteed to cause customers to spend more than they would if paying in cash, according to financial expert and nationally syndicated radio host Dave Ramsey. Credit card debt accumulates when you spend more money than you have and are forced to pay interest on those purchases. If instead you pay cash or use a debit card, you can only spend what you have, and you will see the balance drop with each use. This can be a sobering practice that leads to a smarter and more restricted use of funds when compared with the easy spending of a credit card. Credit card debt may feel less painful when you are spending, but it will be far more painful over the long term.
If you can find no other way out of your credit card debt and the walls are closing in, consider filing for bankruptcy to wipe the slate clean and start over. If you do, expect a negative impact on your credit reports for at least 10 years, after which a slow rebuild can occur. While it is effective, bankruptcy should be your last option, since you can only use it once. In most cases, some form of compromise can be worked out between debtor and creditor, even if it does involve a trip to court.
In some cases credit card debt carries over when the card holder is no longer alive. If you have a joint credit card account with the deceased, or if you're an authorized user and you use the card after the holder has died, you could very well be liable for the debt on the card. In many cases, the estate of the deceased covers the outstanding balance, and if there is anything left over it goes to descendents. Even then, the balance carried in life negatively affects beneficiaries by reducing the amount available for distribution of the estate.
- Dave Ramsey: The Truth About Credit Card Debt
- Kiplinger: What to Know About Credit-Card Debt Collection
- Federal Trade Commission: Knee Deep in Debt
- CNN Money: Controlling Your Personal Debt
- TIME: College Students Are Credit Card Dunces
- TIME: 5 Signs That You’re Borrowing Too Much
- The Wall Street Journal: Confront Your Debt
- Fox Business: After Death, Who Inherits Credit Card Debt?
Robert Morello has an extensive travel, marketing and business background. He graduated with a Bachelor of Arts from Columbia University in 2002 and has worked in travel as a guide, corporate senior marketing and product manager and travel consultant/expert. Morello is a professional writer and adjunct professor of travel and tourism.