Credit card debt is the accumulated balance borrowers owe after making transactions or purchases using their credit. Borrowers can avoid credit card debt by paying off the current balance on their monthly credit card statements.
Credit card debt can be defined as the due balances that result from credit card purchases and transactions. If you have a credit card or credit cards, it will be essential to learn about the ins and outs of this financial product so you can ensure you get the most out of your card and use it wisely.
Different Terms to Understand With Credit Card Debt
When talking about credit card debt, there are a few terms that will come up that you should know about to help you better understand this kind of debt; here are those terms:
Credit cards are a form of unsecured debt. The difference between unsecured vs. secured debt is unsecured debt does not require collateral, while secured debt does. Collateral refers to a piece of property owned by a borrower that serves to secure loan funding or lines of credit. Since credit cards do not require borrowers to put up any property as collateral, lenders will, instead, look at the borrower’s credit score and financial situation to determine if a borrower is qualified for funding.
Revolving Line of Credit
A revolving line of credit means a borrower’s credit limit will renew on a regular basis. Each month borrowers may make credit transactions using their card until they have reached their credit limit. At that point, the borrower may either pay off part of their monthly balance, allowing them to spend against their monthly credit limit once again, or they can wait until their billing period ends. After a borrower’s billing period is over, their credit limit will renew to its original amount.
A billing period, also called a billing cycle, is the length of time a borrower has to spend using their set credit limit. Typically, billing periods for credit cards last one month. A billing period commonly begins and ends on the same day each month, and borrowers can often pick the start and end dates of their billing period.
At the end of each billing period, the amount of money a borrower has spent during that billing period will be added to their current balance.
A credit card balance refers to the amount of money a borrower owes at the end of their billing cycle. Credit cardholders are responsible for paying back their card balance in monthly payments. Or, a borrower may pay off their entire balance with a single monthly payment. If possible, try not to carry a balance on your credit card from month to month.
Credit Card Statement
A credit card statement, also referred to as a credit card bill, is a comprehensive summary of a borrower’s credit card usage for a particular billing period. Borrowers are responsible for paying back the debt indicated on their credit card statement.
On a borrower’s credit card bill, they will see their monthly balance as well as their current balance. A monthly balance is the amount of debt a borrower has accumulated over the course of a single billing period, while a current balance is the amount of debt a borrower has accumulated overall.
Credit Card Issuer
Credit card companies that extend lines of credit to approved borrowers are known as credit card issuers. Another term to describe a credit card issuer may be a creditor. A creditor is any kind of financial institution that extends loans or lines of credit to borrowers.
The Annual Percentage Rate vs. Interest Rate
It is extremely important that credit card users understand credit card APRs and interest rates. An annual percentage rate is the percentage of interest borrowers must pay on their credit card balance, along with fees and other charges, over the course of a year. Interest rates, on the other hand, are calculated using only the borrower’s current balance.
The Annual Fee
Many types, but not all types, of credit cards, come with an annual fee. An annual fee is a charge borrowers must pay once a year in order to take advantage of the rewards their credit card may offer. Before you commit to having a credit card account, make sure you can afford this extra yearly charge. Otherwise, there are plenty of quality credit cards out there that do not have an annual fee.
Federal Reserve Bank
The central bank of the U.S. is referred to as the Federal Reserve System. The Federal Reserve performs five major functions, they are:
- Regulates monetary policies to ensure citizens are represented when it comes to employment, stable prices, and long-term interest rates.
- Seeks to support the stability of the American economy while minimizing systemic risks.
- Supports the safety and credibility of all financial institutions.
- Helps the banking industry and government foster payment and settlement systems safety and efficiency.
- Promotes financial protection for American consumers.
Credit Card Cash-back
Cash-back is a common reward offered with most types of credit cards. Borrowers can utilize credit card cash-back features by requesting cash when they make in-person purchases using their credit cards. For example, say you were buying groceries using your credit card. After the cashier rings up your groceries and gives you your total, let them know you would like cash back. The cashier will then add the amount of cash back you requested to your grocery total and will distribute the cash to you after your credit transaction has gone through. If you are using a self-checkout station, the machine will usually give you the option to request cash back before you make your final payment.
How Much Credit Card Debt is Normal?
Credit card debt can be represented by a consumer’s credit utilization rate. A credit utilization rate is how much a consumer has in available credit compared to how much debt they owe. For example, if you had a credit card with a $5,000 limit and you were carrying a balance of $2,500, your credit utilization ratio would be 50%. To avoid falling into overwhelming debt, credit bureaus suggest that consumers try to keep their credit utilization no higher than 30% if they can.
What Does Credit Card Debt Look Like in America?
Credit card debt is one of the most common financial struggles Americans have to deal with. The credit card debt problem has gotten worse in recent years with supply chain shortages, inflation, rising prices, and other economic effects of the COVID-19 pandemic. As of Q4 of 2022, the average interest rate for a credit card has increased to 20% from 16%.
Below are some credit card debt statistics according to a study conducted by the credit bureau, TransUnion.
- Americans have an average credit card debt of $5,474.
- Approximately 510.0 million credit cards are currently in circulation in the United States.
- The current borrower-level delinquency rate for credit cards is about 1.94%.
- 46% of credit card users carry a balance.
But how are Americans accumulating more credit card debt these days? Well, NPR talked to senior industry analyst, Ted Rossman, about the cause of credit card debt. He said, “Contrary to popular opinion, it’s not usually a vacation or shopping spree. It’s usually something pretty practical that gets you into credit card debt. But unfortunately, it’s easy to get in and hard to get out.” To avoid falling into the cycle of debt Rossman refers to, try not to rely on your credit card for recurring bills or everyday purchases. Furthermore, if you can, try not to carry a balance.
Types of Credit Cards
There are many different types of credit cards. Learning about the different credit card types and how they work can help you avoid cards that won’t work for your personal financial situation. But, when used properly, the right kind of credit card product can actually help you improve your finances!
Reward Credit Cards
Reward credit cards are cards that allow users to redeem statement credits, gift cards, merchandise, etc. But, reward cards can be tricky because they encourage users to use their credit limit on everyday purchases to rack up reward points. So, if you cannot pay off your balance, this type of credit card may cause you to accumulate unnecessary debt.
Cash-back Credit Cards
Cash-back credit cards allow users to receive rewards simply by spending using their credit limit. For example, say your credit card was offering a cash-back reward for restaurant purchases. That means if you pay your restaurant bill with your credit card, you will receive back credit for a portion of the money you spent. Some credit cards allow users to redeem cash-back for any purchase, and some specify a category of retailers that qualify for cash-back rewards.
Balance Transfer Credit Cards
Borrowers who have a substantial amount of credit card debt might be looking into a balance transfer card. Consumers can use certain types of credit cards for balance transfers that can potentially help them save money on Credit card interest rates. However, there are wait times and fees associated with balance transfer credit cards. So, unless you can pay off your new balance in about three months or less, a balance transfer card may not be the best choice for you.
Travel Credit Cards
Some credit cards have rewards specifically designated for travel. These rewards may be travel miles or hotel discounts. One thing to keep in mind with travel credit cards is that they often have a higher annual fee. So, if you do not often travel or cannot afford a high yearly fee, travel credit cards won’t be very advantageous for you.
Business Credit Cards
Credit cards that are designated specifically for business use are called business credit cards. Business owners can get this special type of card to pay for business-related expenses like:
- Supplies needed to run their business successfully.
- Repairs or maintenance if the business is run out of a brick-and-mortar location.
Student Credit Cards
Student credit cards were designed to introduce students and young adults to handling their finances independently. Since student credit cards are essentially “beginner cards,” they usually have very low credit limits. However, student credit cards are also known for having interest rates on the higher side, which may put some students at risk of accumulating overwhelming debt.
Secured Credit Cards
Borrowers can pre-pay their credit limit each month when they have a secured credit card. That way, borrowers don’t have to worry about racking up a high balance because they pay off their balance before they ever spend a dime!
Co-branded or Retail Credit Cards
Companies, local businesses, or even retail shops often allow customers to set up credit card accounts. Co-branded and retail credit cards work similarly to traditional credit cards but may only be used at specific locations, stores, etc. If you commonly shop with a particular retailer, it may be worth it to see if they offer credit cards so you can receive discounts and other perks!
How To Reduce Credit Card Balances
Those dealing with massive credit card debt know just how stressful this financial struggle can be. Thankfully, there are steps you can take to reduce your credit card debt quickly and efficiently. Then, you can move forward with a fresh slate knowing how to manage your finances responsibly.
Stop Using Your Card Until You’ve Lowered Your Balance
To avoid racking up more debt while you pay off your credit card, stop using it to make new purchases. That way, you know exactly how much money you have to pay off and never have to worry about adding new debt to that total.
Furthermore, it’s better to simply stop using your credit card and retain your active account status instead of just canceling your credit card account altogether, especially if that card is your oldest financial account on file. If you are having trouble with not using your credit card, try cutting up the physical card so you can’t use it.
Create a Debt Management Plan
Trying to pay off debt without a set plan can seem daunting and endless. But when you schedule out a debt management plan, you can clearly see how long it will take to pay off your debts, as well as how much you should be contributing on a regular basis to reach your goal of becoming debt free. Two popular methods people use to pay off debts are the snowball or avalanche methods.
Debt Snowball Method
Paying off debts with the snowball method involves making your smallest debt payments first and then working your way up to the larger ones.
Debt Avalanche Method
To use the avalanche method to pay off your debt, start with the largest debts first and then work your way down until you finally pay off your smallest debt.
Set Up An Emergency Fund
If you don’t have a savings account already, it may be a good idea to set one up ASAP. Consumers who make it a priority to save money often find themselves dealing with less stress when it comes to surprise bills or unexpected expenses.
Work On Your Credit
Working on improving your credit history and credit report can be a huge help in getting you out of debt. By boosting your score, you may have access to new financial products with lower interest rates that you can put toward your credit card debt.
Pay More Than Your Minimum Payment Due
When making your credit card payment, try to pay more than just the minimum you owe. By paying more than your minimum amount due, you will be paying off your debt faster, as well as reducing the amount of interest charges you have to pay!
Try a Debt Consolidation Loan
After working on improving your credit score, you may try a debt consolidation personal loan to help organize your credit card debt. Personal loans are a versatile financial product available to a wide variety of people. While you can usually get approved for a personal loan even if you have less-than-perfect credit, you have a better chance of receiving higher loan amounts and reduced rates when you have a better credit score.
Negotiate Credit Card Debt
What if your credit card debt is out of hand, and you don’t think you can pay it all off? In this case, you may want to try negotiating your credit card debt. Credit card issuers are often willing to work with borrowers to come up with a debt payment plan, especially if it means preventing that consumer from becoming delinquent on their account.
What Is The Difference Between Negotiating and Settling Credit Card Debt?
When getting out of credit card debt, it is important to understand the difference between negotiating debt and settling debt. Negotiating debt involves working with your creditors and coming up with a payment plan. This payment plan may include extended terms, balance transfers, or switching to a different financial product. Settling debt, on the other hand, involves working with a debt settlement company that negotiates debt on your behalf. People often work with debt settlement companies as a final resort to avoid declaring bankruptcy.
Last Resort: Declaring Bankruptcy
If you are absolutely unable to pay off your debt and have no way of getting financial assistance, then you may consider declaring bankruptcy. When you declare bankruptcy, you are formally acknowledging to all lenders and financial institutions that you have no money and are unable to keep up with your financial obligations. Before you declare bankruptcy, know that your credit score will take a major hit that will take seven years or more to recover from.
Credit Card Debt Inflation Interest Rate Payments Federal Reserve | NPR.org
Settling Credit Card Debt | Federal Trade Commission
Credit and Debt | USA.gov
About the Fed | Federal Reserve Board
Credit Card and Personal Loan Balances Reach Record Levels as Consumers Navigate High Inflation, Rising Interest Rates | TransUnion