Credit card debt
Encyclopedia
Credit card debt is an example of unsecured consumer debt
, accessed through credit card
s.
Debt results when a client of a credit card company purchases an item or service through the card system. Debt accumulates and increases via interest
and penalties when the consumer does not pay the company for the money he or she has spent.
The results of not paying this debt on time are that the company will charge a late payment penalty (generally in the US from $10 to $40) and report the late payment to credit rating agencies. Being late on a payment is sometimes referred to as being in "default
". The late payment penalty itself increases the amount of debt the consumer has.
When a consumer has been late on a payment, it is possible that other creditors, even creditors the consumer was not late in paying, may increase the interest rates the consumer is paying. This practice is called universal default
.
Foreign Credit Card Debt:
Declines in credit card debt are often misinterpreted because they fail to include information about charge-offs
. The possible causes for a decline in credit card debt are consumers paying down their debt, credit card companies writing charged-off debt off their books, or a combination of the two. Inclusion of charged-off debt can therefore significantly impact debt trends and the characterization of a nation’s financial health. For example, the $10.3 billion decrease in outstanding credit card debt in Q3 2010 relative to the previous quarter might at first glance seem to be a significant consumer pay down. However, considering that the Q3 credit card charge-off rate was $16.9 billion, consumers actually increased their overall debt by $6.6 billion during this quarter.
Consumers also commonly pay down a large portion of their credit card debt in the first fiscal quarter of the year as this tends to be the time when people receive holiday bonuses and tax refunds. However, credit card debt tends to increase throughout the rest of the year.
Credit card debt is said to be higher in industrialized countries . The average U.S. college graduate begins his or her post-college days with more than $2,000 in credit card debt. The median credit card debt in America is $3,000 and number of cards held is two.
(APR). A survey conducted by the U.S. Public Interest Research Group in March 2002 found that among its fifty participants, including people of all credit backgrounds, who contacted their credit card issuers, 56 percent received a lower APR. On average the percentage went from 16 percent to 10.47 percent.
Due to the start of the Great Recession in December 2007, multiple credit card debt relief options became widely popular for consumers living in the U.S. with unsecured debt
totaling over $5,000.
The various debt relief options available in the U.S. include:
Although each of these debt relief options deals with credit card debt specifically, they are also able to deal with other types of debt including personal loans, medical debt
, accounts in collections and more (depending on the specific program type). Still, these programs have not been enough to help enough Americans get out of debt, resulting in a government call-to-action by economists for a massive debt bailout.
overcome consumers who frequently do not pay off their debt, and the customer declares bankruptcy
. If a customer files for bankruptcy, the credit card companies are required to forgive all or much of the debt, unless such discharge of debt is successfully challenged by one or more creditors, or blocked by a bankruptcy judge on legal grounds irrespective of creditors' challenges.
Because forgiveness of debt reduces likelihood of profit and continued survival, the companies are generally willing to offer another deal to the consumers in danger of bankruptcy. This deal consists of reduced APRs, removal of past late fees and penalty charges, and reaging the accounts so that the credit agencies see them as late accounts.
at the federal level to tighten American bankruptcy law, making it harder to have credit card debts canceled.
Consumer debt
In economics, consumer debt is outstanding debt of consumers, as opposed to businesses or governments. In macroeconomic terms, it is debt which is used to fund consumption rather than investment...
, accessed through credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
s.
Debt results when a client of a credit card company purchases an item or service through the card system. Debt accumulates and increases via interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
and penalties when the consumer does not pay the company for the money he or she has spent.
The results of not paying this debt on time are that the company will charge a late payment penalty (generally in the US from $10 to $40) and report the late payment to credit rating agencies. Being late on a payment is sometimes referred to as being in "default
Default (finance)
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either...
". The late payment penalty itself increases the amount of debt the consumer has.
When a consumer has been late on a payment, it is possible that other creditors, even creditors the consumer was not late in paying, may increase the interest rates the consumer is paying. This practice is called universal default
Universal default
Universal default is the term for a practice in the financial services industry in the United States for a particular lender to change the terms of a loan from the normal terms to the default terms Universal default is the term for a practice in the financial services industry in the United States...
.
Credit card debt statistics
Quarterly Credit Card Debt in the United States Since 2010:- Q2 2011: $771.7 billion
- Q1 2011: $764.0 billion
- Q4 2010: $810.2 billion
- Q3 2010: $790.8
- Q2 2010: $801.1
- Q1 2010: $811.9
Foreign Credit Card Debt:
- United KingdomUnited KingdomThe United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
(March 2009) £64.7 billion - AustraliaAustraliaAustralia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
(2007) $41 billion (AUD)
Declines in credit card debt are often misinterpreted because they fail to include information about charge-offs
Charge-off
A charge-off or chargeoff is the declaration by a creditor that an amount of debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent on a debt. Traditionally, creditors will make this declaration at the point of six months without payment...
. The possible causes for a decline in credit card debt are consumers paying down their debt, credit card companies writing charged-off debt off their books, or a combination of the two. Inclusion of charged-off debt can therefore significantly impact debt trends and the characterization of a nation’s financial health. For example, the $10.3 billion decrease in outstanding credit card debt in Q3 2010 relative to the previous quarter might at first glance seem to be a significant consumer pay down. However, considering that the Q3 credit card charge-off rate was $16.9 billion, consumers actually increased their overall debt by $6.6 billion during this quarter.
Consumers also commonly pay down a large portion of their credit card debt in the first fiscal quarter of the year as this tends to be the time when people receive holiday bonuses and tax refunds. However, credit card debt tends to increase throughout the rest of the year.
Credit card debt is said to be higher in industrialized countries . The average U.S. college graduate begins his or her post-college days with more than $2,000 in credit card debt. The median credit card debt in America is $3,000 and number of cards held is two.
Relieving credit card debt
Account holders can request a reduction in their annual percentage rateAnnual percentage rate
The term annual percentage rate , also called nominal APR, and the term effective APR, also called EAR, describe the interest rate for a whole year , rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate...
(APR). A survey conducted by the U.S. Public Interest Research Group in March 2002 found that among its fifty participants, including people of all credit backgrounds, who contacted their credit card issuers, 56 percent received a lower APR. On average the percentage went from 16 percent to 10.47 percent.
Due to the start of the Great Recession in December 2007, multiple credit card debt relief options became widely popular for consumers living in the U.S. with unsecured debt
Unsecured debt
In finance, unsecured debt refers to any type of debt or general obligation that is not collateralised by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment....
totaling over $5,000.
The various debt relief options available in the U.S. include:
- Debt settlementDebt settlementDebt settlement, also known as debt arbitration, debt negotiation or credit settlement, is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full....
- Debt consolidationDebt consolidationDebt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan....
- Credit counselingCredit counselingCredit counseling is a process that involves offering education to consumers about how to avoid incurring debts that cannot be repaid through establishing an effective Debt Management Plan and Budget...
- Chapter 7 bankruptcy and Chapter 13 bankruptcy
Although each of these debt relief options deals with credit card debt specifically, they are also able to deal with other types of debt including personal loans, medical debt
Medical debt
Medical debt refers to debt incurred by individuals due to health care costs and related expenses.Medical debt is different from other forms of debt, because it is usually incurred accidentally or faultlessly...
, accounts in collections and more (depending on the specific program type). Still, these programs have not been enough to help enough Americans get out of debt, resulting in a government call-to-action by economists for a massive debt bailout.
Bankruptcy concerns
Sometimes the late fees, high annual percentage rates (APRs), and universal defaultUniversal default
Universal default is the term for a practice in the financial services industry in the United States for a particular lender to change the terms of a loan from the normal terms to the default terms Universal default is the term for a practice in the financial services industry in the United States...
overcome consumers who frequently do not pay off their debt, and the customer declares bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
. If a customer files for bankruptcy, the credit card companies are required to forgive all or much of the debt, unless such discharge of debt is successfully challenged by one or more creditors, or blocked by a bankruptcy judge on legal grounds irrespective of creditors' challenges.
Because forgiveness of debt reduces likelihood of profit and continued survival, the companies are generally willing to offer another deal to the consumers in danger of bankruptcy. This deal consists of reduced APRs, removal of past late fees and penalty charges, and reaging the accounts so that the credit agencies see them as late accounts.
Political aspects
Some credit card companies made lobbying effortsLobbying
Lobbying is the act of attempting to influence decisions made by officials in the government, most often legislators or members of regulatory agencies. Lobbying is done by various people or groups, from private-sector individuals or corporations, fellow legislators or government officials, or...
at the federal level to tighten American bankruptcy law, making it harder to have credit card debts canceled.
See also
- Maxed OutMaxed OutMaxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders is an independent feature-length documentary film and book that chronicles abusive practices in the credit card industry....
– 2006 documentary about credit card debt and the national deficitUnited States public debtThe United States public debt is the money borrowed by the federal government of the United States at any one time through the issue of securities by the Treasury and other federal government agencies...
.