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Understanding Credit Card Debt

Updated: Jun 14

Understanding Credit Card Debt

Credit card debt is a form of unsecured liability accrued through the use of revolving credit card loans. This debt accrues as borrowers open multiple credit card accounts with varying credit limits and terms. All of a borrower's credit card balances are reported and tracked by credit bureaus. The total outstanding debt on a borrower's credit report is typically made up of credit card debt as these accounts are revolving and remain open indefinitely.

The Good Side of Credit Card Debt

Credit cards, while notorious for high-interest rates, offer numerous benefits to borrowers. They come with revolving credit limits that borrowers can utilize as needed. Payments are typically much lower than a standard non-revolving loan. Plus, borrowers have the option to clear their balances each month to save on interest costs in the long run.

Credit cards also come with reward incentives such as cash back or points that can be used towards future purchases or even to pay down outstanding balances.

The Impact of Credit Card Debt on Credit Scores

Credit card debt is highly influential in determining a borrower's credit score. It's because it typically makes up a significant part of credit utilization on a borrower's credit profile.

Credit bureaus track each individual credit account as itemized trade lines on a credit report. The sum of outstanding credit card debt from these trade lines is the borrower’s total credit card debt. This total is used by credit bureaus to calculate their credit utilization ratio by dividing it by the total credit limit of all the credit cards owned by the borrower.

The Downside of Credit Card Debt

While credit cards can be beneficial, they can also lead to problems for borrowers. Negative activities such as delinquent payments, high balances, and numerous hard inquiries in a short span can lead to problems for credit card users.

Maintaining on-time payments is crucial to achieving a good credit score. However, if a borrower becomes delinquent, it can negatively affect their credit score.

Since credit card utilization is a significant factor in a borrower's credit score, paying down large portions of outstanding credit card debt is one of the best ways a borrower can rapidly improve their credit score. Keeping credit card balances low will also help a borrower maintain a good credit score.

Debt Management Plans

A good credit counselor will spend time reviewing your specific financial situation and then offer customized advice to help you manage your money. If after that review, it's decided that a debt management plan is best for your situation, it's wise to check with all of your creditors to ensure they offer the types of modifications and options the credit counselor describes to you.

Dealing with Debt Collection

If a borrower's debt has already gone to a debt collector, it's crucial to communicate with the collector. This communication can help validate the debt and confirm whether it's genuinely the borrower's.

The Role of Debt Settlement Companies

Debt settlement companies negotiate with creditors to allow the borrower to pay a "settlement," or lump sum of money that's less than what they owe. This lump sum is agreed upon to settle the debt.

However, these companies often encourage borrowers to stop making any monthly payments to their creditors, which can lead to additional fees and interest.

The Risks of Debt Settlement

Debt settlement can be risky. If a company can't get your creditors to agree to settle your debts, you could end up owing even more money in late fees and interest. You could also still receive calls from debt collectors and have your credit report and credit score negatively affected.

Bankruptcy as a Last Resort

Bankruptcy is generally considered the last option due to its long-term negative impact on your credit. Bankruptcy information stays on your credit report for ten years, making it difficult to get credit, buy a home, get life insurance, or even get a job.

There are two main types of personal bankruptcy - Chapter 13 and Chapter 7. Both types can help rid of unsecured debts like credit card or medical debt, and stop foreclosures, repossessions, garnishments, and utility shut-offs, as well as debt collection activities.

Credit Repair After Paying Off Debt

Once a borrower has paid off their debt, they can take steps to repair their credit. No credit repair company can legally remove accurate negative information from your credit report. However, time can make accurate information go away.

A credit bureau can report most accurate negative information for seven years and bankruptcy information for ten years. Information about an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer. The seven-year reporting period starts from the date the event took place.


While credit card debt can provide flexibility and convenience, it can become a burden if not managed well. It's crucial to understand the implications of credit card debt, from its effect on your credit score to the potential for debt collection. Furthermore, while solutions like debt settlement and bankruptcy exist, they should be considered last resorts due to their long-term impact on your financial health. Ultimately, the best way to handle credit card debt is to use credit responsibly and make timely payments.

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