How Credit Card Debt Becomes A Problem

How Credit Card Debt Becomes A Problem

How Credit Card Debt Becomes A Problem

Initially charge cards began as a luxury tool for individuals with the means and the financial knowledge to use them sensibly. Sadly, after a while they shifted from being a tool for the financially savvy and became a must have for the average American family. Even worse, the average household didn't just have one credit card, but rather had several lines of credit with many separate lenders. These accounts were used to shop for everything from fuel at the local filling station to large ticket consumer electronics gadgets. Although the instant gratification of instantaneous purchases was wonderful, the month to month obligation of ongoing credit card debt has become an absolutely separate story altogether.

With such unrestrained growth in the spending habits of the average shopper, the consumer finance industry has steadily grown to enormous proportions. Along with this increase has come the rapidly growing problem of an excessive amount of debt. In fact, current studies based on the 2010 Federal Reserve report "The Survey of Consumer Payment Choice" indicate that of households carrying credit card debt, the average balance owed by these households is approximately $14,750.00. To gain a better understanding of how this debt piles up, you must have an understanding of the process that takes place when a credit card is used.

Your card is issued by a lending institution, who under the terms of your agreement agrees to extend credit to you up to a stated amount. Every time you purchase using your credit card, you are borrowing against that approved limit and creating a debt balance with the lender. Your credit card debt is the total amount that has been lent to you and is owed to the creditor. Most consumer credit agreements call for the settlement of the debt every thirty days. If the debt is not settled on a monthly basis, a minimum payment is required that includes both a reduction of principal and an interest charge for the outstanding balance. When the minimum payment is not sufficient to cover the accrued interest charged against the account, the actual balance of the account ends up growing. Consequently the consumer may actually have a higher outstanding balance even though they have made their minimum payment.

The thing is, when this scenario repeats itself, the balance continues to grow. Sadly the new balance is not only the interest collecting on the original amount of credit extended, but it is now accruing on interest that has been charged earlier. It is this vicious cycle that snowballs the credit card debt to the point that it can no longer be managed by the consumer. It is at this stage that the consumer has no choice but to turn to outside sources of credit card debt settlement.

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