The credit card debt

The credit card debt is a sad, ever-present reality of the past decade, turned overwhelming by the advent of the very aptly named “credit crunch”. The near-ubiquity of credit cards has become a fact of life, a reality which has long ceased to surprise anyone; however, few of us actually comprehend the sheer volume of credit cards currently in use and the proportional levels of ensuing consumer indebtedness. Here are a few pointers.

At the end of 2008, statistics indicated that 78 percent of American households (about 91.1 million) had one or more credit cards. The U.S. Census Bureau estimates that there were 159 million credit cardholders in the United States in 2000, 173 million in 2006, while by 2010 the number is expected to hit 181 million. At the end of 2008, the credit card debt levels in the US had hit USD 972.73 billion, while average credit card debt per household amounted to USD 8,329 at the end of 2008. Also at the end of 2008, the average outstanding credit card debt for households that have a credit card was USD 10,600.

Of course, up until a few short years ago, the credit card debt – while not ignored per se – was not among the American consumers’ top concerns. The widespread availability of credit, along with banks’ enthusiastic promotion of their credit card offerings, were strangely reassuring; despite repeated warnings to pay credit card balances in full every month and avoid making only minimal monthly payments, cardholders’ attitudes to credit card debt continued to be too lax, while phrases such as credit card debt relief or credit card debt consolidation were hardly part of cardholders’ vocabulary. The repercussions which we so studiously ignored have started to hit over the past two years, and indeed it would seem that many of us are paying dearly for our past overspending.

Credit cards are payment instruments, which are integral part of a complex system. They entitle cardholders to acquire goods and services via a line of credit to which they are given access by the card issuer, and from which the borrower can take away money within a certain limit. One of the significant advantages of owning a credit card (an advantage which has unfortunately proved a trap for many consumers) is the convenience of not having to carry cash around. Credit card payments are fast and easy to make, they appear to simply “happen” with the swipe of a card and a few keystroke – and credit card debt piles up just as easily; research has shown that consumers who go shopping and pay via credit card are likely to spend more than if they went shopping and paid in cash. By the time overspending consumers start considering that they might need credit card debt help, the state of their personal finances has already become tragic; thus, the desperate search for credit card debt relief options begins. Yet, once credit card debt has piled up, credit card debt reduction or complete credit card debt elimination are difficult, slow goals, only achievable with a great deal of effort and some very good financial counseling.

The credit card debt

The credit card debt levels have a significant aspect upon the quality of our financial life. Late credit card payments, for example, have a negative impact on an individual’s credit score, as they constitute an integral part of the person’s payment history, which makes up 35 percent of the final figure of a FICO credit score. Also, if a consumer overuses or maxes out on his credit cards, his so-called rate of credit usage goes up. This refers to the amount of incurred debt as compared to the amount of credit available to an individual at a particular time. The rate of credit usage represents 30 percent of a person’s credit score. If a consumer reaches the point where he is in serious debt and needs credit card debt relief, there are a number of approaches and routes he might take, while all the time bearing in mind that there is no miracle cure for credit card debt.

One possible approach for receiving some help with the credit card debt management is going for the credit card debt consolidation. In essence, debt consolidation refers to the practice of taking one big loan to pay off smaller loans which a consumer as contracted. There are many types of debt consolidation strategies available. Among them, credit card debt consolidation basically means that a cardholder who is in need of credit card debt relief carries out a credit card balance transfer; the is one exception: instead of transferring his outstanding balance from one credit card account to a 0% APR card, the consumer in question transfers all his credit card balances onto a single card, whose issuer charges lower interest rates. However, credit card debt consolidation is not a means to completely dodge credit card debt: it does not actually make any contribution towards lowering your credit card balance, but merely transfers it from one issuer to the other, incurring a hefty 3% or 4% transfer fee in the process. Furthermore, most credit card issuers will only offer a discounted APR for a pre-defined interval, usually ranging from 6 to 15 months, after which they revert to charging a much higher interest rate for the credit card’s outstanding balance.

Yet another, this time more radical route to accessing credit card debt relief is trying to get a credit card debt settlement deal either directly with the original creditor (the bank or credit card company), or else – in case you have completely stopped repaying your credit card balance – with a collection agency, which has taken over your credit card debt from the original creditor. Credit card debt settlement is one of the few relief strategies that allow a consumer to access some form of credit card debt reduction. Credit card debt settlement entails a debtor negotiating an agreement with his creditor in which the latter accepts to be paid a reduced balance (an amount lower than the amount which is rightfully owed) and that will be considered as payment in full for the initial debt. Basically, in exchange for a lower, one-time lump payment, the bank or credit card issuer will discharge the rest of the debt and will report to the credit agencies that the debt is now settled.

The credit card debt

Reaching a credit card debt settlement is not a miracle cure for a consumer’s unpaid credit card debt. However, it is also true that creditors would much rather reach some type of settlement and thus recuperate at least some of the money they are owed by debtors, rather than sue the latter or else risk the debtors filing for bankruptcy and getting their credit card debt discharged.

There are several approaches individuals willing to choose credit card debt settlement deals can choose. Contacting a debt settlement company is one way. Ideally, such a company will handle all aspects of the credit card debt settlement process on behalf of their clients and will assist them in negotiating a reduced balance for their outstanding loans. These services will of course be offered in exchange for a significant fee. Some credit card debt settlement companies will charge a percentage of the total debt; others will impose a flat monthly fee that needs to be paid throughout the entire interval in which they assist a consumer.

Another approach is negotiating credit card debt yourself with your lender. This will allow you to avoid the fees charged by credit card debt settlement companies, and – as intimidating a process as it may sound – it is a route encouraged by many financial advisors. Usually, credit card debt settlement will only be taken into account as a possible debt recovery alternative by lenders unless a consumer is 60 to 90 days late on payments and unless all payments have stopped. Even though credit card debt settlement may sound like an attractive alternative, it does have many negative consequences, one of which is that it will be featured on a consumer’s credit report and will adversely impact his credit score. Also, while it may indeed be the best option for you within a particular set of circumstances, credit card debt settlement may prove difficult to achieve: individual creditors usually take an aggressive anti-negotiations approach; often, they will refuse to talk to consumers about credit card debt settlement deals and about credit card debt relief in general, preferring to take a more intimidating, “pay your balance in full” route.

Perhaps the most overlooked strategy consumers may adopt in order to reduce credit card debt is simply to pay increased attention to their expenses and – unless absolutely forced by extraordinary circumstances – not spend more than they earn. In an age when personal finance management tools abound and advice is free to get online, it is possible – at least in theory – for an individual to lower his credit card debt without completely trashing his credit score in the process. Budgeting, cautious spending and planning short and mid-term spending goals are but a few ideas, while exercising basic caution and restraint is also a good way to start weeding out unnecessary spending.