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Credit Card Debt Meaning

What Is The Difference Between Credit And Debt

Credit Card Debt Explained With a Glass of Water

Quick Answer

Debt is money you owe, while credit is money you can borrow. Credit and debt are not the same, but managing them wisely is crucial to your overall financial health.

Through December 31, 2023, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through to help you protect your financial health during the sudden and unprecedented hardship caused by COVID-19.

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When you’re learning about money management, the words “debt” and “credit” come up a lot. While both words have to do with owing money, credit and debt are not the same.

Debt is the money you owe, while credit is money you can borrow. You create debt by using credit to borrow money. Let’s say you charge $200 on a credit card with a $1,000 credit limit. You now have $200 in debt and $800 in available credit on that account.

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Borrowing Against Your Home

In general, you want to protect your homes equity as much as possible. Borrowing against it is extremely risky, and its usually not worth that added risk to pay off your credit cards. Even if you default on a credit card and it goes to collections, they cant take your home. In fact, they must sue you in civil court to force any kind of repayment. But once you take out an equity loan, your home is at risk of foreclosure if you fall behind with the payments.

Should I Refinance My Home to Pay Off Debts? »

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Good Debt Vs Bad Debt

Some debts are considered “good,” particularly when they have lasting benefits. Such benefits include affordable payments and the opportunity to build wealth or improve your income. Here are a few examples of good debt:

  • Mortgage loans: Mortgage debt is generally considered good debt because not only will you get value from living in the home, but the property value may also appreciate over time. As you pay off the home, you’ll build equitya value asset. Additionally, you may be able to get a mortgage to purchase an income-producing rental property. You can then add that income to your retirement savings or investment portfolio.
  • Student loans:Student loans can be good debt and a wise investment in a student’s future if it gives them the knowledge and skills to substantially increase their earning potential and achieve their goals.
  • Business investments: Business loans allow you to start or grow a business that can support yourself and your family. Another way business loans provide value is they create an asset you can sell or pass on to your family.

Other debts do little to improve your well-being and can hurt you financially if you’re not careful. Some debts make it challenging to keep up with payments and can even lead to financial hardship, such as:

Benefits Of Credit Card Debt

The Truth About Debt Consolidation

Credit cards are one of the most popular forms of revolving credit and offer numerous benefits for borrowers. Credit cards are issued with revolving credit limits that borrowers can utilize as needed. Payments are typically much lower than a standard non-revolving loan. Users also have the option to pay off balances to avoid high-interest costs. Additionally, most credit cards come with reward incentives such as cash back or points that can be used toward future purchases or even to pay down outstanding balances.

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Paying Off Your Credit Card Balance

If you have debt and are only making the minimum monthly repayment, it can feel never ending. This is because the minimum repayment you make might be only a little higher than the interest each month so the amount you owe will reduce very slowly.

Example: if your credit card balance is 1,000 and you pay off 50 each month at an interest rate of 17%, our clearing your credit card calculator shows you that it will take two years to repay the balance, provided you stop using the card. If you increase your repayments to 100 per month, you could clear your balance in 11 months . Our also works out how long it would take to clear your credit card debt if you switch to a credit card with a lower introductory or interest rate. That could mean clearing your debt even quicker and it could also cost you less in interest.

Other Factors To Consider Before Taking Out A Debt Consolidation Loan

Taking on new debt to pay off old debt may just be kicking the can down the road. Many people dont succeed in paying off their debt by taking on more debt unless they lower their spending.

The loans you take out to consolidate your debt may end up costing you more in fees and rising interest rates than if you had just paid your previous debt payments. And, if problems with debt have affected your credit score, you probably wont be able to get low interest rates on the balance transfer, debt consolidation loan, or home equity loan.

Warning:Beware of debt consolidation promotions that seem too good to be true. Many companies that advertise consolidation services may actually be debt settlement companies, which often charge up-front fees in return for promising to settle your debts. They may also convince you to stop paying your debts and instead transfer money into a special account. Using these services can be risky.

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What Is A Credit Score

A credit score is a three-digit number that typically ranges from 300 to 850. Credit scores provide a quick snapshot of your credit history to help creditors assess the likelihood you’ll repay a debt. A higher credit score indicates you’re more likely to make on-time payments than someone with a lower credit score.

Scoring companies such as FICO calculate your credit score using data from your credit report, including your current and past credit accounts, your record of making payments, the status of your accounts and so on.

Here’s a breakdown of what makes up your FICO® Score:

Ask The Expert: An Easy Way To Tell You Have Too Much Debt

I Have $70,000 in Credit Card Debt!

Theres not one numeric answer to the question of how much debt is too much. The threshold of what you can handle depends on your income and situation. But Consolidated Credits Financial Education Director April Lewis-Parks explains one easy metric that you can use to assess if your balances are too high.

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Find A Payment Strategy

Making on-time, complete payments every month will help you avoid potential late payment fees and interest rate hikes that can make your debt even more unmanageable. Aside from the basics, you should come up with a specific plan of attack. Two common debt repayment strategies are the debt snowball and debt avalanche methods.

How Do I Get A Credit Card If I Dont Have Any Credit

Building credit history can be a bit of a catch-22. If you dont have any credit, merchants or banks are less likely to extend credit to you since youre an unproven borrower. Opening a secured credit card is one of the simplest ways to get started. Since spenders are only borrowing from the money they put down as a deposit, there is little risk for the lender, and it gives them a snapshot of your spending and repayment habits.

Another way to start building credit is to become an on an established credit account, such as a parent or spouse. The cardholders credit history will appear on your account, adding longevity to your credit report. But be sure that the person with whom you partner has good credit habits. If their financial choices are poor, that will also reflect on you.

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Does A Line Of Credit Affect Your Credit Score

Opening a new line of credit can affect your credit score in a number of ways, for better or worse, and so will how you manage that credit moving forward. Heres how a line of credit affects your credit score:

  • New inquiry: When you apply for a line of credit, the lender makes a hard inquiry on your credit history, which will appear on your credit report for two years and can impact your FICO score for up to 12 months.
  • Length of credit history: Opening a new line of credit decreases the average age of your accounts. This can lower your credit score, particularly if you dont have a lengthy .
  • : When you open a credit line, you add a revolving credit account to your credit history, which can improve your if you didnt previously have any revolving accounts. Having a variety of different types of accounts to your name may raise your credit score.
  • Amounts owed: Drawing on a personal line of credit affects your , which is the amount of revolving credit youre using divided by your credit limit. While how much youve borrowed through a HELOC is not considered by FICO when determining your credit utilization ratio, FICO does consider HELOCs in calculating the amount of money you owe. Having a large amount of debt from a HELOC or other accounts can lower your credit score.
  • Payment history: Making on-time monthly payments on your line of credit builds your payment history and can raise your credit score, while paying late or missing payments will likely cause your score to fall.

Ask For Help If You Cant Make A Payment

Why People Fall Into Credit Card Hell

While your credit card company is under no obligation to accept less than the requested minimum payment, do not fear. Try to work with your credit card company to work out payment agreements, says Lita Epstein, author of The Complete Idiots Guide to Improving Your Credit Score.

If thats unsuccessful, work with a credit counselor from the National Foundation for Credit Counseling to come up with a repayment plan, she says.

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Build Credit The Right Way

Managing debt responsibly helps you build a good credit history. But if your credit journey is only beginning, getting approved for new credit accounts can be challenging. Experian Go can help you establish and grow your credit from the ground up. Building a positive credit history and practicing healthy credit habits can have a positive impact on your credit score.

How Does A Credit Card Affect Your Credit Score

A credit card account can affect your credit score much like a line of credit.

  • New inquiry: Applying for a new credit card leads to a hard inquiry being entered in your credit report, which can temporarily lower your score.
  • Length of credit history: Opening a new account reduces the average age of your accounts, which can also lower your score.
  • Amounts owed: Charging purchases to a credit card raises your . A high credit utilization ratio can make it look like youre at risk of using up all of your available credit and may lower your score. Its typically recommended that you keep your credit utilization ratio under 30 percent to maintain a good credit score.
  • Payment history: Paying your credit card bill on time each billing cycle adds to your payment history and can boost your score. There is no penalty to your score from paying your balance in full. In fact, credit card issuers report the balance on your monthly statement to the , so leaving a balance on your card doesnt change what was reported for that month.

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How Does Credit Work

Creditors evaluate your creditworthiness by examining your credit historyyour record of how you’ve repaid debt in the past. Your credit history is detailed in that show your credit activity, including your payment history with each of your credit accounts.

Three major credit bureausExperian, TransUnion and Equifaxcreate consumer credit reports based on borrowing and repayment data that’s voluntarily reported by creditors. Checking your credit reports is often one of the first steps lenders, credit card issuers and other creditors take when evaluating your creditworthiness and deciding whether to extend credit to you.

Protections For Consumers With Credit Card Debt

What’s The Deal | Credit Card Debt

Fortunately, there is legislation in place that protects consumers who are dealing with credit card debt. Keep these in mind when determining which strategy for getting out of debt is best for you. Theyll also help you identify if any debt collection methods youre facing are being conducted legally.

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When Should You Use A Credit Card

Using rewards credit cards is a great way to actually get rewarded for your spending, especially when you can earn big in categories you tend to spend money on anyway, like groceries, dining or gas. Here are our picks for the best rewards cards.

If you have a large purchase in mind it can be worth finding a card that offers a 0 percent introductory APR so you can pay off the balance over time without interest.

Credit cards provide more significant protections against fraud than some other payment methods, including debit cards. Many credit card issuers offer cardholders $0 fraud liability. Thus, a credit card is often a good choice if youre concerned about security, such as when traveling or shopping at online retailers.

Borrowing Against A Life Insurance Policy

If you have a life insurance policy that has cash value, then you can usually borrow against it. But just because you can doesnt mean that you should. If you take money out, you effectively take out a loan against your insurance policy. You make a new debt with a whole new set of problems.

If you dont pay the money back or die before its paid off, then the insurer will take out the amount owed plus interest. In other words, your family will have less life insurance to help them live after youre gone. That money is there to provide your family with a financial safety net in case the worst happens. You dont want to do anything that will weaken that safety net.

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Government Credit Card Debt Relief Programs

A common misconception is that there are federal credit card debt relief government programs that consumers can use to get out of debt. For the record, there are no grants or any federally sponsored repayment plans to pay off your credit card debts. That being said, the federal government does oversee and regulate the debt relief industry, which is where some of the confusion about government debt relief programs comes from.

The Concept Behind Securitization Of Debt

Credit Card Debt up to 15 Percent of Annual Household Income. Average ...

The concept behind the securitization of debt is risk management. By pooling the same debt class securities under one marketable financial product, the yield of the securitized debt goes up, but the risk still remains low.

As these securitized assets consist of hundreds of thousands of the same debt class, so if a couple of debt deteriorate majority of the assets are still all right. This also helps in mitigating the credit risk that arises from a single asset.

The securitized assets consist of tranches, higher tranches, and lower tranches. Higher tranches consist of high-quality debt securities and low tranches consist of lower-quality debt securities.

So, if the securitized assets are properly layered, they provide great risk management, which reduces risk but increases the yield of these financial products.

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How Can Credit Card Debt Be Written Off

Generally, writing off some or all of your credit card debt is done through a debt solution. There are multiple debt solutions that can allow you to write credit card debt off, including:

Every debt solution is different, and has its own benefits and drawbacks, so be sure to read up on each one thoroughly before you decide which one youd like to proceed with.

If youre not sure which debt solution would be best for you, then please call our helpline team on 0800 280 2816 for free, no-obligation advice from one of our friendly debt advisers.


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