Credit card debt

Credit card debt or plastic fantastic is an example of unsecured consumer debt, accessed through ISO 7810 plastic credit cards.

Debt results when a client of a credit card company purchases an item or service through the card system. Debt accumulates and increases via interest and penalties when the consumer does not pay the company for the money he or she has spent.

The results of not paying this debt on time are that the company will charge a late payment penalty (generally in the US from $10 to $40) and report the late payment to credit rating agencies. Being late on a payment is sometimes referred to as being in "default". The late payment penalty itself increases the amount of debt the consumer has.

When a consumer has been late on a payment, it is possible that other creditors, even creditors the consumer was not late in paying, may increase the interest rates the consumer is paying. This practice is called universal default.

If the customer is carrying an amount of debt that is so high that it is over their credit limit, then they might be charged an over-the-limit fee of up to $39 until their balance is paid down to below their credit limit. This, too, may add to the consumer's debt.

Credit card debt statistics

• United States (April 2005) $753 billion
• United Kingdom (July 2004) £55.1 billion
• Australia (2007) $41 billion (AUD)

Credit card debt is said to be increasing in the industrialized countries. The average U.S. college graduate begins his or her post-college days with more than $2,000 in credit card debt.

Bankruptcy concerns

Sometimes the late fees, high annual percentage rates (APRs), and universal default overcome consumers who frequently do not pay off their debt, and the customer declares bankruptcy. If a customer files for bankruptcy, the credit card companies are required to forgive all or much of the debt, unless such discharge of debt is successfully challenged by one or more creditors, or blocked by a bankruptcy judge on legal grounds irrespective of creditors' challenges.

Because forgiveness of debt reduces likelihood of profit and continued survival, the companies are generally willing to offer another deal to the consumers in danger of bankruptcy. This deal consists of reduced APRs, removal of past late fees and penalty charges, and reaging the accounts so that the credit agencies see them as late accounts.

Political aspects

Some credit card companies made lobbying efforts at the federal level to tighten American bankruptcy law, making it harder to have credit card debts canceled. Recently it was reported that Americans are paying off credit card debt more frequently, and this was attributed in part to the bankruptcy legislation supported by the companies.

Germany, as an example for a country which did not have a notion of personal bankruptcy at all until the early 2000s, and still makes the process very much more difficult than the United States, has consistently had much lower levels of credit card debt. On the other hand, a debtor in Germany is very much in a worse position than one in the United States.

References

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