Credit Card Debt

credit card debt

Credit cards can serve as a convenient personal loan system with low Annual Percentage Rates (APR) and additional spending incentives, but they can also be a double-edged sword for your personal finances. They are an easy form of personal loans to get into & use but can be difficult to pay off if you find yourself buried beneath a mound of credit card debt.

How Credit Card Debt Works

At their foundation, credit cards are a form of revolving debt that allows you to borrow against a pre-established line of credit. They allow borrowers to make purchases now while paying off credit card debt over time.

Debt from credit cards is unsecured, meaning it is not backed by collateral and thus is riskier to lenders. This is why credit cards carry some of the highest interest rates across all types of debt.

The maximum borrowing limit of a credit card is often determined by the income, credit history, and total assets of the borrower. Purchases can be made with the card up to the maximum limit. With most credit cards, a minimum payment is required to be made each month & interest is charged on any unpaid amount that remains in the balance at the end of the month.

Credit cards often account for a majority of someone’s credit utilization, so they are usually a large factor in determining a borrower’s credit score.

Benefits of Credit Card Debt

Benefits of Credit Card Debt

Credit card debt can be used to create a positive timeline of credit history as long as the borrower does not maintain a high balance or make delinquent payments. This type of debt can be great for improving credit score as all credit card activities are documented & reported by the major credit bureaus.

Additionally, borrowing with credit cards provides advantages such as:

  • Low minimum payments. Compared to other forms of revolving debt, credit cards are generally accompanied by much lower minimum payments.
  • Short-Term Pay off optional. A borrow does not have to completely pay off the debt accrued on a credit card each month, but doing so can help credit card holders avoid paying high-interest costs.
  • Most credit cards have extensive rewards programs that offer cash back or travel mileage as a % return on whatever is spent on the card. These rewards can seem small at first but can be quite sizeable depending on how much is spent on the card over time.

As long as the debt is paid off each month, there are numerous benefits to using credit card debt to make purchases.

Average Credit Card Debt in the U.S.

Although the total volume of revolving debt in America has grown to be larger than $1.02 trillion in 2018, the average level of credit card debt carried by each U.S. household has actually fallen year-over-year from 2016-2018.

Just over 40% of households in America carry some level of credit card debt, with indebted households averaging around $9,300 of credit card debt towards the latter half of 2018. Compared to 2016 and 2017 where the average credit card debt for the same households was approximately $11,000, 2018 saw a 15% decrease in the average amount of debt carried for this category.

According to ValuePenguin, average levels of credit card debt carried also vary widely based on age, geographic location in the United States, income level, and gender.

How Much Credit Card Debt is Safe to Carry?

While the “safe” level of credit card debt will vary from person to person, most experts agree that an individual should aim to utilize less than 30% of their available credit. However, when looking at the average credit utilization ratio (% of total credit that is used), Americans born after the baby boomer generation use closer to 40% of their credit on average.

Relieving Credit Card Debt

Relieving Credit Card Debt

Relieving the pressure of credit card debt can be nearly impossible when only making the minimum payments. For those who are serious about getting rid of their debt from credit cards, there are a few different options to consider such as:

  • A Debt Management Plan. Debt management can offer credit card debt relief by reducing debtor’s monthly payments & interest rates. This plan also involves in-depth management of your budget and prioritization in paying off credit cards with the highest interest rates.
  • Credit Card Debt Consolidation. Consolidation is done by combining all credit card debts into one bill with lower monthly payments and less interest. Most often, this method involves taking on a debt consolidation loan or a balance transfer credit card to centralize the debt.
  • Debt Settlement. The settlement is a process where negotiation is done directly with the creditor to reduce: credit card APR, penalties & late fees, the total debt owed. If a creditor believes a debtor is incapable of paying off the credit card debt, then they are more likely to settle for a payout that is less than the total owed.

If you’re looking for professional help with debt relief, check out our debt settlement company ratings to get an idea of who might offer you the best options for relieving credit card debt.

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