What Is Credit Card Debt?

Credit card debt is a type of unsecured liability that is incurred through revolving credit card loans. Borrowers can accumulate credit card debt by opening numerous credit card accounts with varying terms and credit limits. All of a borrower’s credit card accounts will be reported and tracked by credit bureaus. The majority of outstanding debt on a borrower’s credit report is typically credit card debt, since these accounts are revolving and remain open indefinitely.

Understanding Credit Card Debt

Generally, credit card debt refers to the accumulated outstanding balances that many borrowers carry over from month to month. Credit card debt can be useful for borrowers seeking to make purchases with deferred payments over time. This type of debt does carry some of the industry’s highest interest rates. However, credit card borrowers do have the option to pay off their balances each month to save on interest over the long term.

Benefits of Credit Card Debt

Credit cards are one of the most popular forms of revolving credit and offer numerous benefits for borrowers. Credit cards are issued with revolving credit limits that borrowers can utilize as needed. Payments are typically much lower than a standard non-revolving loan. Users also have the option to pay off balances to avoid high-interest costs. Additionally, most credit cards come with reward incentives such as cash back or points that can be used toward future purchases or even to pay down outstanding balances.

Credit Bureau Reporting and Analysis: What to Know

Lenders report credit card debt level balances to credit bureaus each month along with a borrower’s relevant credit activity. Thus, credit cards can be an excellent way for borrowers to build out a favorable credit profile over time. However, negative activity such as delinquent payments, high balances, and a high number of hard inquiries in a short period of time can also lead to problems for credit card borrowers.

Credit card debt is highly influential in determining a borrower’s credit score since it will typically account for a significant portion of credit utilization on a borrower’s credit profile. Credit bureaus track each individual credit account by itemized trade lines on a credit report. The aggregation of outstanding credit card debt from these trade lines is the borrower’s total credit card debt, which is used by credit bureaus to calculate their credit utilization ratio by dividing it by the aggregate amount of credit limits of all credit cards owned by the borrower. Credit card utilization is an essential component of a borrower’s credit score.

Lenders will also report a borrower’s payment activity to credit bureaus each month. Delinquent payments detract from a borrower’s credit score while on-time payments help their credit score. Maintaining on-time payments helps a borrower to achieve a higher credit score and qualify for better lending terms. Since credit card utilization is also a factor in a borrower’s credit score, paying down substantial portions of outstanding credit card debt is one of the best ways a borrower can rapidly improve their credit score. Keeping credit card balances low will also help a borrower to maintain a good credit score.