What Is a Credit Card Debt?
When you incur a credit card debt, you actually keep borrowing money every month, and that is why it is also known as revolving debt. It is only good until you can repay them, but when you can’t, the debt keeps accumulating. When compared to the loan accounts, you can actually keep using your credit card accounts for an indefinite time. On the other give, in the case of installment loan accounts, after you have cleared out the entire balance, the account will be closed.
Another thing that you must keep in mind about a credit card debt is that it is an unsecured type of debt. In simpler terms, there is nothing that the company can seize, like a house or a card, even when you have failed to repay them. But yes, if you are not able to repay the money you borrowed from the credit card, it is going to affect your credit score drastically.
How Is Credit Card Debt Accumulated?
When you get a credit card, you will see that there will be a due date within which you have to clear the entire balance that you have accumulated on your credit card, and if you fail to do so, you will be accumulating debt. There is a term called APR or Annual Percentage Rate and this is a rate of interest that is charged on your debt when it keeps accumulating one month after the other. The APR that you will be charged may not be the same as someone else’s and this is because it keeps differing with your credit history, the bank issuer, and the type of card that you have.
The benchmark fed funds rate of the Federal Reserve and the prime rate of the credit card interests is somewhat tied, and that is the average value.
The credit card debt will increase or decrease concerning any changes in the target rate made by the Fed.
Now, I want to give you an even clearer picture of how this debt accumulates.
For starters, there is a minimum payment that you will have to pay every month whenever you use your credit card to make purchases. This payment iscalculated based on a certain percentage (with some additional interest charges) of your balance. If you pay this amount in full, then well and good, but if you don’t, then you will be liable to interest. So, the interest will increase if you pay even lesser. The reason behind this is that the nature of credit card interests is compounding, so the interest keeps accruing. Thus, if you take a longer time to clear off the debts, then you will owe a huge amount of money to the enterprise, which is much more than what you owed before.