The Basic Issues About Credit Card Debt for You to Be Aware Of

Between 2005 and 2010, America's total "revolving credit" debt at any given time ranged between $800 billion and almost $1 trillion. Revolving credit accounts allow you to borrow up to a maximum, pay off some of the debt, then borrow more; credit cards are the main source of revolving credit. America's reliance on credit card spending raises issues both for individuals and for the financial system.

Convenience

Credit cards are a convenient way to pay when you have no cash--too convenient, critics of card use say. Writing in "Time," Barbara Kiviat says that one study shows people using credit cards are willing to pay twice as much for something they want as when they spend cash. Financial guru Dave Ramsey says on his website that McDonalds customers spend 47 percent more on their orders when using credit. Even if you pay off your bill every month, your card may be luring you into overspending.

Rates and Fees

Many people pick their card based on a low introductory rate, Kiviat says, and don't bother to compare what the rates will rise to later. In the long run, this often means steeper interest payments. Cardholders also rarely consider late fees and overage charges, assuming these will never be a problem. But because most cardholders do screw up eventually, these fees can add up to a substantial amount over time.

Utilization Rate

Your credit score isn't based just on how much you borrow, but on the utilization rate -- the difference between your debt and the total debt available. Kathy Kristof states on the CBS Money Watch website that canceling credit cards with a low or zero balance and a high debt limit can be a mistake: Even though you haven't taken on any added debt, your credit report shows you're utilizing more of your available credit, which could lead to lenders charging higher interest rates.

System Shock

The early 21st century's wave of foreclosures badly weakened the economy, and some experts predict that credit card debt will eventually do the same. In "Bloomberg Business Week," Jessica Silver-Greenberg says that as borrowers start floundering, lenders try to protect themselves with higher interest rates, which makes borrowers fall even further behind. In addition, if cardholders default on the debt, the lenders don't have a claim on their property the way a mortgage lender does, so the card companies stand to lose heavily.