Credit cards have become the preferred mode of payment and most people avoid carrying cash in their wallets. They are issued by banks and other institutions which actually open a line of credit for the user and the user can borrow money to pay merchants for buying their goods or services. They can also be used to get cash advances.
The credit card is issued only after an account has been approved by the credit provider. Each time a credit card is used, the consumer is incurring a debt that he has to repay. Thus credit card debt is a form of unsecured consumer debt. The option to make multiple purchases with the credit card with no immediate need to make the full payment make users buy more than what they can afford. The credit card concept is to ‘buy now and pay later’. It is this gap between purchases and payments that can be termed as credit card debt. This debt accumulates as the interest on the unpaid amount keeps getting added to the amount.
Some Credit Card Facts
- The average American carries a credit card debt of $8000. It is this debt which is making the economic recovery of the country difficult.
- The figures have reached this level because the world talks about the advantages of credit cards, and how they are substitutes for cash which get you extra miles, reward points and freebies.
- No one ever talks about the fact that credit cards are basically a debt instrument that let you buy on credit, or on the promise of future payments rather than present cash-in-hand.
- It entices all card owners to buy more than they can afford. It leads to compulsive spending which is not so much with cash.
- Credit cards require a minimum payment, which pleases the user, since he feels he can put off the full payment for some time. But instead of stopping his spending spree till the previous amount is cleared, he keeps buying through his card and the amount keeps multiplying with interest amounts increasing consistently. This wipes out any benefits or a discount offered to card holders, and increases his actual cost.
- Non-payment of credit card dues and increase in debt levels due to the high interest rate, is sure to lead users towards bankruptcy.
- The interest paid on credit card debt could be used beneficially to build a capital base. Paying an interest on outstanding amounts is like money down the drain.
- A high credit card debt is likely to affect the credit score of the user.
- The long term costs of using credit cards makes every product purchased at least double its price tag.
- Credit card debt may initially hike the user’s life style but when the time of payment comes, it can bring the same crashing down.
- Credit card debt is a form of consumer debt since it is incurred not for major expenses but for conspicuous consumption- a lot of which is unnecessary.
Credit card spending has become a way of life that is addictive and this has led to high levels of credit card debt being incurred. There are no positive effects of this situation, instead it is a precursor to tougher times financially.