What You May Not Know About Credit Card Debt

What is Credit Card Debt?

Credit card debt is an unfortunate situation that occurs when an individual over-extends themselves by purchasing goods with credit beyond their means to pay the debt. In essence, credit card debt occurs when an individual’s debt, as a result of their credit card use, exceeds their ability to pay the debt or their income.

Credit card debt is fairly easy to get involved with, even if the consumer maintains some sort of budget. The reasoning behind this prevalence is that financial institutions who issue credit cards do so with interest or APR rates attached. These rates are multiplied into unpaid monthly balances. Over time, these small percentage increases can suffocate a borrower.

Why do most people get in Credit Card Debt?

In addition to interest rates, all credit cards are attached with finance fees, usage fees and other terms that may be hidden in the original credit card agreement. That being said, credit card debt occurs most frequently when an individual becomes reckless with their lines of credit.

The majority of consumers with credit card debt, when given the ability to purchase a product in good faith, do not acknowledge the long-term problems that could arise from an over-extension. Those stricken with credit card debt purchase goods with the assumption that they will pay them off in the future.

Unfortunately, unforeseen events occur, such as layoffs or other costs, which prevent an individual from making significant credit payments. As a result, the consumer is only able to make minimum payments, which is attached with interest charges.

Example of how APR affects my Credit Card payments

If a consumer has a credit card with an available credit line of $500 and an annual percent rate of 20% and spends the full credit amount of $500 in one month on various goods and services, he or she will be required to pay off that debt over time. Credit card billing cycles are monthly, meaning the individual is required to pay off all or some of the debt at the end of each month.

If the individual does not pay the $500 and only pays the minimum (typically $15), the APR of 20% will be applied to the next month’s bill in the form of a monthly fee (.20/12), or .01667. Add 1 to this figure to reveal 1.016, which is then multiplied by your remaining balance. Therefore, if you have $485 due next month, you will take $485 and multiply it by 1.016 to yield a new balance of $492.76. This added $7.76 may not seem like much, but over time as more credit is made available and subsequently used, this figure will grow exponentially.

In addition, if you multiply the $7.76 times 12 (months) you can see that you are paying nearly $100 in interest for a small credit line. Credit cards with larger lines of credit will obviously have larger figures.

Therefore, those who extend themselves more, meaning they buy more goods with credit, will be more susceptible to facing severe credit card debt. The terms attached to each credit card will vary based on the issuing institution’s protocol and the credit score of the prospective borrower.

How to avoid or get out of Credit Card Debt

There are numerous ways to get out of credit card debt, the most basic of which is to develop a budget and only purchase items that are needed on credit. The development of a budget, in alignment with your disposable income, will ensure that you do not exceed your ability to repay the debts.

Aside from this basic step, an individual facing credit card debt can consolidate their payments by contacting their lender and developing a more feasible repayment plan.

In addition to personal approaches, an individual can get out of credit card debt through the inclusion of a credit counseling agency. These organizations will provide educational resources on how to properly balance one’s debt. A credit counseling agency will also work with the individual’s lenders to create repayment plans that are more feasible.

Aside from incorporating a credit counseling service, an individual can engage in credit repair by filing for bankruptcy. In most cases, filing for bankruptcy is a last resort form of credit repair. That being said, credit card bankruptcy will, in essence, clear an individual’s credit history after a few years.

As stated before, credit repair is vital for those individuals facing mounting debts because a poor credit score will prevent an individual from obtaining any source of financing in the future, including mortgages, credit cards with favorable terms, personal loans, leases, and in some cases employment.