What is credit card debt?

Credit card debt is a constant problem for many people. But falling into huge credit card debt is not inevitable.

Issuing banks offer credit cards as revolving loans, and any portion of the balance that you don’t pay off on your monthly billing statement rolls over to the next statement and earns interest. Credit card debt carries higher interest rates than other types of lending rates because they are unsecured debt, which means the lender has no collateral to confiscate if you don’t pay up.

Here’s what you need to know about credit card debt so you can use your cards to your advantage, not harm.

How credit card debt works

It is very easy to get into huge debts. When you start out, your credit limit is usually low, but it can increase over time if you pay on time, every time – and this can make the inflated fee tempting.

Paying off debt is difficult because as the balance grows, interest accrues and payments increase. And when your funds are due to pay off your previous expenses, less money is available for your current and future expenses.

Here are a few ways to make progress on paying off your credit card debt:

How to avoid credit card debt

Here’s what you need to do to avoid the pitfalls that lead to credit card debt:

Charge for what you can afford to pay

You can definitely use credit cards regularly and be debt-free forever. How? By charging only what you can afford to pay. Use credit cards as a payment instrument, not as a renewable debt instrument. For this method to work, you must track payments and cash flow.

Financing your purchase with a credit card can be reasonable if the repayment period is short. Let’s say you want to buy $1,500 worth of living room furniture, but you don’t have the cash to pay for it. If you charge your credit card at an 18 percent interest rate and pay off the balance within four months, the finance charge is only $57. Not a bad deal. But if you return it within two years, you’ll pay an extra $300 – and that’s a hefty markup.

Pay off the balance on time every month

Not only is it smart to stay out of debt to make a profit, but also to have large account balances that negatively impact your credit score.

To maintain a high score, your account balance must be less than 30 percent of your available credit limit, says Lucy Dani, TransUnion’s senior director of online marketing. And many personal finance experts advise getting your credit usage as close to zero as possible.

Timely payments are also important. If you are late and miss your billing cycle, your lender will report the delinquency after 60 days to the three major credit reporting agencies (TransUnion, Equifax and Experian) and your score will drop markedly.

Skip more payments and you’ll see a sharp deterioration in your credit score. And those negative scores don’t disappear from your credit reports for seven whole years.

Get help if you can’t make a payment

Although your credit card company is not required to accept payment below the required minimum amount, fear not. “Try working with your credit card to work out payment arrangements,” says Lita Epstein, author of The Complete Idiot’s Guide to Improving Your Credit Score.

“If that doesn’t work, work with a National Credit Counseling Foundation loan counselor to develop a repayment plan,” she says.

Ask for forgiveness, but agree carefully

Want to pay off your credit card debt for less than your actual balance? It’s possible, but you need to offer a lump sum payment, and most lenders will only do this for borrowers that are at least a few months past due.

It’s best to arrange the deal with your card issuer yourself because the companies that facilitate this often charge significant fees and some of them are not very reputable. However, you should only attempt to resolve the situation after less drastic debt relief efforts fail, as this can lead to significant credit damage and tax problems.

“Debt forgiven is often considered taxable income,” says Norman Perlmutter, author of How to Settle Your Debts. And if it “didn’t result from bankruptcy or your debts didn’t exceed your assets when you entered into the agreement, you’ll have to pay tax on that,” he added.

Solve credit problems immediately

It is extremely important to address any credit issues immediately because if you don’t, there will be legal consequences. The creditor can sue you in court, and if he wins the judgment, he can take your wages or seize property and assets that are not subject to release.

How to pay off credit card debt

There are several ways to pay off credit card debt.

• The avalanche method is to pay off the credit cards with the highest APR first to save as much interest as possible.
• Another way to pay off debt is the snowball method, which focuses on paying off the cards with the lowest balance first, rather than paying off the cards with the highest APR.
• You can also use several different debt consolidation strategies, including getting a balance transfer card and getting a debt consolidation loan.

bottom line

Credit card debt is a problem for many people, but not for you. Life without debt is within the power of every cardholder. The main thing is to always be aware of what you are paying for and what your balances are. A good rule of thumb is to only charge what you can afford and always pay your bills on time. Also, if and when credit problems arise, address them immediately.

Erica Sandberg is a renowned personal finance professional and author of Waiting for Money: The Essential Financial Plan for New and Growing Families. Her articles and insights have been featured in The Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSN Money and Dow Jones MarketWatch. An active TV and radio commentator, Sandberg is a credit and money management expert at KRON-TV in San Francisco, and a frequent guest on Forbes Video Network, Fox Business News, Bloomberg TV and all Bay Area networks. Prior to starting her own reporting and advisory business, she worked at the San Francisco Consumer Credit Counseling Service, where she advised individuals, conducted educational seminars, and managed media relations. Sandberg is a member of the Society of American Business Editors and Writers and a member of the advisory committee for Project Money.