Credit card debt can leave you feeling desperate, isolated, and ashamed. But you’re not alone. In fact, almost half of all Americans carry some form of credit card debt, and that number is steadily rising. More importantly, there are solutions that can help you find relief from financial stress. For many, finding the right solution begins by learning how credit card debt works.
How Credit Card Debt Works
Credit card debt accumulates when you don’t pay off your credit card in full by the end of each billing cycle. When the balance is carried over to the next billing period, interest accrues in the form of the annual percentage rate (APR). APR is the percent of interest charged on purchases, cash advances, and balance transfers, and it compounds. This means that interest grows on top of interest and the longer you take to pay off a debt, the more you’ll owe.
Credit card lenders usually require at least a minimum monthly payment of 1% to 2% of the balance, plus interest and fees. If you are carrying a high balance or are struggling financially, paying the minimum may be the only feasible way to stay up-to-date with your credit card bills. But minimum payments can be a debt trap.
Let’s look at an example:
By only paying the minimum, you could end up paying significantly more in interest than what you originally charged on your card, and it can take years to pay off your debt.
It’s also important to note that credit card debt is an unsecured debt. This means it is not backed by collateral, such as a home or a vehicle. Fortunately, failure to pay the debt will not result in the lender putting a lien on your home or seizing your car. But not paying debt can seriously damage your credit score and snowball into an even larger financial burden.
Credit Card Debt FAQs
Let’s take a look at some of the most common questions about how credit card debt works:
How does credit card debt affect my credit score?
Credit card debt can have a significant impact on your credit score. If you are making payments but allowing interest to increase the debt, the total amount of the balance may adversely affect your score. Late or missing payments can severely damage your credit score.
How do I know what my credit score is?
You are entitled to a free credit report once every 12 months from each national credit bureaus (Experian, Equifax, and TransUnion). You can also pay a small fee to request another copy within the year. Always be sure to use this opportunity to validate the information on reports. If you notice errors, you can contact the company you believe made the error and can also file a dispute with the bureau reporting it.
Will checking my credit report affect my credit score?
No. Checking your credit report through the bureaus will not affect your credit worthiness. However, if a lender or card issuer requests your credit report, this can drop your score by a few points.
Can my APR change?
Yes. There are many factors that can affect the APR of your credit card, including:
- The prime rate: Changes in the prime rate can result in changes in your APR.
- Your credit score: Card issuers continually monitor your creditworthiness and can increase your rate 45 days after sending you a notice. This APR increase will only apply to new transactions that occur 14 or more days after the notice is mailed to you.
- End of introductory offers: If your credit card had an introductory APR period, your APR will change at the end of this timeframe. For example, if you signed up for a credit card with a 0% introductory rate, your APR will increase after the introductory period is over.
- Late or missed payments: A lender can increase your APR if you are more than 60 days late on a payment. This is called a penalty APR.
What is a penalty APR?
If you’re late or missing payments, a penalty APR may be applied to your balance. This is usually much higher than your regular APR and can significantly increase your overall balance. If you are less than 60 days late on making a payment, the APR may only be applied to new charges. However, after 60 days this can be applied to your total balance.
How can I improve my credit score?
Your credit score can be improved by ensuring that you are not maintaining a substantial balance and are consistently making payments on time. Decreasing your total debt is the best way to improve your score as this shows lenders that you are not a high-risk borrower since you pay off your balances in a timely manner.
What happens if I can’t pay my credit card debt?
If you are completely unable to make payments on your credit card debt, your account may be charged off after 180 days of being past due. This means that the account is closed and written off as a loss.
Charge-offs can have long-term effects on your credit score and remain on your credit report for up to seven years. Significantly, you will still be responsible for paying the amount you owe. The credit card company may try to collect the debt via their own collections department or a third party.
If you are having difficulty keeping up with payments and paying off your debt, it may be time to consider alternative debt relief options such as debt settlement.
What is debt settlement?
Debt settlement means negotiating with lenders to reduce the amount owed. While it is possible to do this yourself, it can be difficult and time-consuming. A debt relief expert can simplify the process by negotiating on your behalf and supporting you throughout the process.
When you enroll in a debt relief program, you typically open a separate account with the debt relief company. Then, instead of paying the credit card company, you will deposit monthly payments into this account. While the debt relief expert works to negotiate the lowest possible payment amount for a balance, the money deposited into the new account will be used to settle the debts.
National Debt Relief Can Get You Back on Track
Since 2009, National Debt Relief has helped over 450,000 Americans pay off their debts and create brighter futures. Our program involves a debt settlement process that partners you with coaches and advisors to help manage your balances. We negotiate with major credit card issuers and banks to reduce your debt and help you regain stability as fast as possible. We also provide in-depth guidance to ensure you understand how credit card debt works and can make smart choices after you graduate from our program.
Want to know if debt settlement is the answer for you? Our dedicated team of debt experts can walk you through your options to help you find the best solution. With our knowledge and support, you can start the journey toward the life you want.
National Debt Relief helps people nationwide resolve $10k or more in unsecured debt. Our debt coaches negotiate with creditors on your behalf so that you pay a fraction of what you owe and can become debt free in as little as 24-48 months.
