How Credit Card Debt Works

Written By Aaron Sarentino
Aug 18, 2022
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Americans L.O.V.E credit cards! 

According to a recent report by TransUnion, a record 196 million Americans held credit cards at the end of 2021. That’s more than half of the entire US population!

When used wisely, a credit card can be a useful financial tool to unlock worthwhile rewards and improve your credit score. 

But this is not always the case – many consumers are drawn into a cycle of overspending. 

When you receive your first credit card, and become credit aware, the temptation to spend more than you can actually afford can be powerful. The high charges on amounts overdue can quickly spiral out of control. Credit card debt can easily get ahead of you, wreaking havoc on your finances and credit score.

Since they were introduced in the 1950s, the national credit card debt gradually increased as consumers reached for credit cards to cover the cost of everyday living. 

Credit card balances reached $1.043 trillion in January 2022, a number that’s well above the previous peak reached in 2008.

If you’re struggling with credit card debt, it can start to feel like a black hole you can never climb out of. Credit card debt doesn’t have to be like a never-ending cycle of payments. You can regain control of your debt and pay it off. 

Read on to learn more about how credit card debt works and stay ahead of the credit card debt trap.

Credit Cards Explained

Credit cards are unsecured credit. 

This means that the issuer has decided that based on your credit history, they’re willing to take a risk and let you charge up to a certain credit limit specific to you. It’s not backed by your home or car that acts as collateral, so the lender can’t claim and sell it if you stop making payments.

Provided you repay enough that you never owe more than your credit limit, you can keep borrowing month after month. Unlike installment loan accounts that lenders close once the balance is paid off, credit card accounts can be used indefinitely.

You’re required to make at least the minimum payment every month on your debt, but you can keep adding charges to the card. Minimum payment is a fraction of your balance, around 1-2 percent, plus interest charges and any applicable fees. Every time you add to the amount owed, the minimum amount you’re supposed to pay each month increases. Read our post here on how do minimum payments work.

When you don’t pay off the full balance, you’re charged interest on the unpaid balance. You’ll receive a statement that tells you exactly how much you owe at the end of every billing cycle.

Credit card interest compounds, meaning interest accrues on interest. This will continue to accumulate until you settle your balance, meaning you can get even further behind.

Credit card balances that are carried month to month are charged interest in the form of APR – Annual Percentage Rate. 

PS: You should know how much the credit company will charge you if you’re not going to pay your balance off in full.

Types of Credit Card Interest

Interest plays a vital role in the credit card process for both the lender and the borrower. 

For the borrower, interest represents the price for making credit card purchases and maintaining a revolving credit card debt balance.

For the credit card company, interest is a major profit driver.

Credit card interest typically falls into 1 of 3 categories – fixed, variable, and promotional.

  • In a fixed interest scenario, the interest rate remains unchanged, but this stability comes with a price in the form of higher interest rates in the 17-20 percent range.
  • With variable-rate credit cards, credit card companies use the prime rate as a benchmark to which they add a margin, or percentage points, to arrive at the interest rate charged ultimately. The margin added is a function of your credit score and profile – the higher your score, the lower the percentage points and the overall interest rate charged.
  • Promotional/introductory credit cards are preferred by borrowers looking to consolidate higher interest rate credit card debt. The downside to this type of credit card interest is that when the promotional period ends, borrowers are charged prohibitively high credit card interest rates.
Signs That You Might Be Owing Too Much Credit Card Debt
  • You use one credit card to pay another
  • You spend more money overall every month than you earn
  • Late or missed payments on credit card accounts to afford other bills
  • You depend on credit cards to afford everyday purchases like gas and groceries
  • Your monthly income is dedicated to making credit card payments instead of saving
  • You’ve considered filing for bankruptcy
Can Credit Card Debt Affect My Credit Score?

Yes, it can.

Your credit score is the rating used by lenders to predict the risk they’ll assume in granting you credit. 

If you fail to make payments in 180 days, your account may be closed and written off as a loss (charge off). Charge-offs remain on your credit report for up to 7 years. 

Even if you’re making credit card payments but letting interest increase the debt, the total balance may adversely affect your score.

How Do I Check My Score? Will Checking it Affect My Credit Worthiness?

You’re entitled to a free credit report from each of the 3 national credit bureaus (Experian, TransUnion, and Equifax) once every 12 months.

If you want an extra report within the year, you can get it at a small fee. If you notice any errors or omissions on your credit report, be sure to file a dispute with the bureau reporting it. 

And no. Checking your credit report won’t affect your credit score. Only hard checks by the lender or card issuer can drop your score by some points. 

Debt Settlement

 Even though it may feel like a long road, it’s very possible to pay down your credit card debt. Living a debt-free lifestyle is within each cardholder’s capability.

Debt settlement might be a solid option if you’re looking for a more permanent solution to your credit card debt woes.

How it works is that a debt settlement company negotiates new terms with your creditors. Your credit accounts may be closed down, and you may be asked to avoid opening new ones for a period of time.

Typically, debt settlement would only work in your favor if you have a real financial hardship that ensures you would never be able to pay off your balances. 

Are you getting calls from debt collectors? Read our post on how to stop calls from debt collectors.

Settle Your Credit Card Debt Today

Many people fall into credit card debt today because they lack the discipline or confidence to fix their situations.

Asking for help can be tough, especially when it comes to financial troubles.

However, you should not shy from asking for help if you are in dire financial straits. Instead of facing a mountain of credit card debt on your own, know that you’re not the only one affected by this problem, and there are debt relief professionals who can help you out.

If you’re overextended and need help settling your credit card debt, Americor can help you.

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About Americor

Americor provides debt solutions to thousands individuals and families all over the country. We’re a next-generation debt relief company with a proprietary platform designed to help clients get out of debt quickly. Together we’ll develop a strategy for you to enjoy a debt free lifestyle. Learn more about how Americor can help relieve the burdens of debt today.

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We provide debt resolution services. Our clients who make all monthly program payments save approximately 40 – 50% of their enrolled debt (average of 43%) upon successful program completion, before program fees. Fees are based on a percentage of your enrolled debt at the time of starting the program and range from 15%-25% of your enrolled debt. Programs range from 20-48 months. Clients must save at least 25% of each debt due to an enrolled creditor before a bona fide settlement offer will be made. On average, clients receive their first settlement within 4-7 months of enrollment and approximately every 3-6 months thereafter from when the prior debt was settled. Not all Clients complete the program. Estimates are based on prior results and may not match your results. We cannot guarantee that your debts will be resolved for a specific amount or percentage or within a specific timeframe. We do not assume your debts, make monthly payments to creditors or provide tax, bankruptcy, accounting, legal advice or credit repair services. Our program is not available in all states; fees may vary by state. Some programs may be offered through The Law Firm of Higbee & Associates d/b/a Advantage Law. The use of debt resolution services will likely adversely affect your credit. You may be subject to collections or lawsuits by creditors or collectors. Your outstanding debt may increase from the accrual of fees and interest. Any amount of debt forgiven by your creditors may be subject to income tax. Clients may withdraw from the program at any time without penalty and receive all funds from their dedicated account, other than funds earned by the company or fees paid to third-party service providers, as may be applicable. Read and understand all program materials prior to enrolling. Certain types of debts are not eligible for enrollment. Some creditors are not eligible for enrollment because they do not negotiate with debt relief companies. To determine the offers you may be eligible for, Americor conducts a “soft credit pull.” This credit pull does not impact your credit score, creditworthiness, or ability to obtain credit from other sources. The soft pull is not a tradeline entry, it does not report against your score and will only take a few minutes.

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