Credit card debt 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 dollar 10 to dollar 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.
Consumer debt is consumer credit which is outstanding. In macroeconomic terms, it is debt which is used to fund consumption rather than investment. A credit card is part of a system of payments named after the small plastic card issued to users of the system. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.
A credit card is different from a charge card, which requires the balance to be paid in full each month. In contrast, credit cards allow the consumers to revolve their balance, at the cost of having interest charged. Most credit cards are issued by local banks or credit unions, and are the same shape and size, as specified by the ISO 7810 standard.
A secured credit card is a type of credit card secured by a deposit account owned by the cardholder. Typically, the cardholder must deposit between 100% and 200% of the total amount of credit desired. Thus if the cardholder puts down dollar 1000, they will be given credit in the range of dollar 500 dollar 1000.
In some cases, credit card issuers will offer incentives even on their secured card portfolios.In these cases, the deposit required may be significantly less than the required credit limit, and can be as low as 10% of the desired credit limit.
This deposit is held in a special savings account. Credit card issuers offer this because they have noticed that delinquencies were notably reduced when the customer perceives something to lose if the balance is not repaid. Some consider all debt incurred for anything else other than investments unwise or detrimental to the economy, while others believe that consumer credit is beneficial to the economy.
Historically, across many cultures, being in personal debt was considered almost immoral. More recently, an alternative analysis might view consumer debt as a way to increase domestic production, on the grounds that if credit is easily available, the increased demand for consumer goods should cause an increase of overall domestic production.
The permanent income hypothesis suggests that consumers take debt to smooth consumption throughout their lives, borrowing to finance expenditures (particularly housing and schooling) earlier in their lives and paying down debt during higher-earning periods. 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.