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What is Credit Card Debt?

5 min read

Published August 20, 2024

Table of contents

Key Takeaways

Credit card debt consists of outstanding balances across a person’s credit card accounts.
Credit card debt can impact credit scores substantially because it affects factors used to calculate your score, like credit utilization.
Credit counseling or balance transfer offers can help you avoid bankruptcy if your debt becomes challenging to manage.

When used strategically, a credit card can make shopping more convenient and help you build a strong credit history. However, you may end up with unmanageable credit card debt if you use your card irresponsibly and can’t pay your balance in full each month, or at least the minimum monthly payment.

The Consumer Financial Protection Bureau (CFPB) estimated in April 2023 that the national amount owed in the U.S. could reach $1 trillion, marking a new record. Credit card debt is a reality for many Americans, so it’s important to understand how it works and what to do if debt becomes difficult to manage.

Credit card debt definition

As you spend with your credit card, your growing balance technically becomes credit card debt. If you don’t repay your balance in full each month, your credit card debt grows.

Your credit card debt includes the principal cost of any credit card purchases you haven’t repaid, the interest those costs accumulate, and any fees your creditor charges over time.

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Credit card debt is considered revolving credit, meaning you can keep borrowing against your credit as long as you pay at least the minimum amount due and remain within your credit limit.

When you take out a loan for a fixed amount—like a mortgage or student loan—that balance appears on your credit report, but it doesn’t count toward credit card debt.

How credit card debt can impact your credit score

Managing credit card debt is crucial because of its significant influence on your credit score. The amount of money each borrower owes accounts for around 30% of a credit score calculation, depending on the credit scoring model used.

However, your credit score doesn’t only assess the total amount you owe. Instead, creditors evaluate your credit utilization ratio. Your credit utilization ratio compares the sum of your debts to your total available credit–the combined amount of each account’s credit limit. Ideally, you should keep your outstanding balances significantly lower than your available credit.

If you have a high credit limit on multiple credit cards, having a small balance on one card may have little effect on your credit score. However, if you have high balances on all your cards, it could raise your credit utilization ratio and lower your credit score.

In addition to skewing your credit utilization ratio, credit card debt may affect your credit score in other ways. If you carry a reasonable balance and pay at least your monthly minimum payment on time each month, that may demonstrate responsible credit usage. However, missing or late payments could harm your credit score.

How much credit card debt is too much?

There’s no magic number that represents “too much credit card debt.” It depends on your financial circumstances. Generally speaking, paying off your credit card balance in full each month is a good idea. However, when that’s not possible, ensuring your debt remains manageable is essential for your financial well-being.

Using your credit card to make purchases you can’t afford may cause your debt to escalate quickly and become difficult to control, especially as it builds interest. If you struggle to make your minimum monthly payment for your credit card bill, you likely have too much debt and may want to cut back on spending.

As soon as you realize you won’t be able to afford an upcoming payment, you should contact your credit card company. They may offer you relief for a temporary hardship or work with you to change your repayment plan.

A credit counselor may be able to help you develop a debt management plan. One debt relief strategy is the debt snowball method, in which you pay off smaller debts first (while making minimum payments on more significant debts) and work your way up to the larger ones.

Debt consolidation loans and balance transfer credit cards are other options and may help you reduce your monthly payments or interest; however, it’s critical to understand the terms so you don’t end up paying more in the long run. In extreme cases, credit card debt can become so overwhelming that bankruptcy becomes the only option. Developing good spending habits and changing harmful ones could help you avoid reaching that point.

Did you know?

If you’re carrying a high balance on your credit card from month to month, the interest rate could be costing more than you’d like. You may be able to save on interest charges and help reduce your credit card debt with a balance transfer credit card offer from Discover.

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While credit card debt is common, it’s essential to take it seriously because it may pose a risk to your credit score. Staying on top of payments and sticking to your budget can help you avoid unnecessary debt. If your credit card debt does become difficult to manage, many resources are available to help you tackle it, like credit counseling and balance transfer credit card offers.

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