CREDIT CARD DEBT

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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 $10 to $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.

If the customer is carrying an amount of debt that is so high that it is over their credit limit, then they might be charged an over-the-limit fee of up to $39 until their balance is paid down to below their credit limit. This, too, may add to the consumer's debt.

Credit card debt statistics

• United States (April 2005) $753 billion

• United Kingdom (July 2004) £55.1 billion

• Australia (2007) $41 billion (AUD)

Credit card debt is said to be increasing in the industrialized countries. The average U.S. college graduate begins his or her post-college days with more than $2,000 in credit card debt.

Bankruptcy concerns

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.

Political aspects

Some credit card companies made lobbying efforts at the federal level to tighten American bankruptcy law, making it harder to have credit card debts canceled.[2] Recently it was reported that Americans are paying off credit card debt more frequently, and this was attributed in part to the bankruptcy legislation supported by the companies.

Germany, as an example for a country which did not have a notion of personal bankruptcy at all until the early 2000s, and still makes the process very much more difficult than the United States, has consistently had much lower levels of credit card debt. On the other hand, a debtor in Germany is very much in a worse position than one in the United States.

Reality check

The first step on the road out of debt is to admit - to yourself - just how much trouble you're actually in.

So, before you do anything else, work out your expenditure, and exactly how much you owe.

Once you've done this, you should have a much clearer idea of where corners can be cut.

According to Fool.co.uk, seven out of ten credit applications are likely to be rejected by the time we reach 2012.

For the millions of Britons who are currently getting by on plastic, this is obviously a pretty scary thought. What would our lives be like if we couldn't use credit cards, or go into our overdrafts, or take out loans?

However, every cloud really does have a silver lining. This could be the push we all need to hoist ourselves out of debt - and there's still time to get our finances in order.

Obviously, one way to protect yourself from future turbulence in the credit markets is to try to get into a position where you don't need so much credit. Have a look at the tips below to get away from being credit-dependent:

1. Reduce your outgoings

To minimise your need for credit in the future, you need to tackle the debts you have right now.

So, have a look at your outgoings. If you can, cut the interest payments on your debts. For example, switch your credit card debt to one offering 0% on balance transfers. This means you will stop paying interest on your existing debt, and should allow you to pay it off quicker (as long as you stop spending!).

Set yourself a goal - for example, to reduce your monthly outgoings by £100. Shaving money off household bills, cutting your travel costs and remortgaging your home could all be ways to achieve this.

2. The snowball effect

Once you've whittled down your outgoings to a minimum, snowball your remaining debts. This will help clear them as quickly, and cheaply, as possible.

To do this, work out which of your debts is charging the most interest. That's the one that's growing the fastest - so attack it first.

But before you start, remember that you need to make the minimum payments on all of your borrowings. If you have any spare cash after this, aim it at the most expensive debt. If you don't have any spare cash, make switching this expensive debt to a loan or a credit card that charges less interest a top priority.

When you've paid this 'nasty' off, switch your attention to the next most expensive debt. The cash 'snowballs' you throw at your debt will get larger and larger, and eventually you'll be clear of all your debt.

3. Try to up your income

Another good way to get out of the red is to up your income.  Even an extra £100 a month could make a big dent in your debts - and paying them off more quickly could save you hundreds, or even thousands, in interest charges.

4. Saving for a rainy day

After all that dealing with debt, you might think you deserve a reward. By all means enjoy yourself, but don't go spending mad!  Instead, start saving your spare cash to set up an emergency fund.

That way, you'll be in an excellent position to weather the predicted financial storms ahead.  Remember, you're not alone.  See the links below on this page for free impartial advice on how to deal with this growing problem.

A smart card, combining credit card and debit card properties 

A 3 by 5 mm security chip is embedded in the card enabling 

electronic access to the chip

FREE DEBT ADVICE

Visa's "Happy Shoppers" credit card design

LINKS and REFERENCE

• Send your questions to the bbc experts

• New protection for IVA customers

• Millions 'spend more than income'

• Church in new debt campaign

• Banks 'prey on customers in debt'

• Rise of the 'white-collar tramp'

• Property 'no solution' to debts

• More insolvencies ahead for 2008

• New credit system 'may cut debt'

• Your guide to personal budgeting

• Your credit rating explained

• Choosing a personal loan

• Interest-free deals laid bare

• Q&A: How to manage debt

• http://www.chicagotribune.com/business/yourmoney/sns-yourmoney

• JS Online: Bankruptcy laws may be tightening

• The credit card miracle of 2005. - By Daniel Gross - Slate Magazine

Citizens Advice Bureau

The Citizens Advice Bureau service offers free, confidential, impartial and independent advice.

You can find out details of your local CAB by using the website's online directory (see link on right) or by looking up its local offices in your telephone directory.

Consumer Credit Counselling Service

The service offers free advice and information to those affected by debt.

Consumer Credit Counselling Service
Wade House
Merrion Centre
Leeds
LS2 8NG

Tel: 0800 138 1111

National Debtline

A helpline that offers confidential and independent advice to those in debt.

National Debtline
Tricorn House
51-53 Hagley Road
Birmingham
B16 8TP

Tel: 0808 808 4000
Fax: 0121 703 6940

Advice UK

The new name for the Federation of Information and Advice Centres.

It is a large network of advice-providing organisations.

Telephone: 020 7407 4070 or visit its website.

For agencies in Northern Ireland, contact the Association of Independent Advice Centres on 028 9064 5919.

Credit reference agencies

The following agencies hold information about people's credit histories. When you apply for a loan or credit card, this information is taken into account before any deal can be approved. You can always check your credit history to make sure the information is correct, by contacting these agencies.

Experian Ltd
Consumer Help Service
P.O. Box 8000
Nottingham
NG80 7WF
08702 416 212

Equifax Credit Information
Credit File Advice
PO Box 1140
Bradford
B21 50S
08705 143 700

Ireland:
Irish Credit Bureau
ICB House
Newstead
Clonskeagh
Dublin 14
00 353 1 260 0388 (From UK)
01 260 0388 (From Ireland)

Information Commissioner

The commissioner is responsible for enforcing the law regarding data protection and freedom of information

Information Commissioner
Wycliffe House
Water Lane
Wilmslow
Cheshire
SK9 5AF

Tel: 01625 545 745
Fax: 01625 524 510

The Insolvency Service

The service provides information for individuals and businesses affected by insolvency.

The Insolvency Service
21 Bloomsbury Street
London
WC1B 3QW

Tel: 020 7291 6895

Council of Mortgage Lenders

The CML represents the interests of mortgage lenders in the UK

Council of Mortgage Lenders
3 Savile Row
London
W1S 3PB

Tel: 020 7437 0075

Financial Ombudsman Service

the Financial Ombudsman Service provides consumers with a free, independent service for resolving disputes with financial firms

Financial Ombudsman Service
South Quay Plaza
183 Marsh Wall
London
E14 9SR

Tel: 0845 080 1800
Fax: 020 7964 1001

Financial Services Authority

The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal

The Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS

Tel: 020 7066 1000

Financial Services Compensation Scheme

The FSCS may pay compensation if an authorised firm is unable to pay claims against it.

Financial Services Compensation Scheme
7th Floor
Lloyds Chambers
Portsoken Street
London
E1 8BN

Tel: 020 7892 7300 Fax: 020 7892 7301

General Insurance Standards Council

The council is the watchdog established to set, monitor and enforce standards in all areas of general insurance, including the fair treatment of customers.

General Insurance Standards Council
110 Cannon Street
London
EC4N 6EU

Tel: 020 7648 7800
Fax: 020 7648 7808

The Institute of Chartered Accountants

The Institute of Chartered Accountants is the largest professional accountancy body in Europe, with over 125,000 members.

Institute of Chartered Accountants in England & Wales
Chartered Accountants' Hall
PO Box 433
Moorgate Place
London
EC2P 2BJ

Tel: 0207 920 8100

The Institute of Chartered Accountants of Scotland

CA House
21 Haymarket Yards
Edinburgh
EH12 5BH

Tel: 0131 347 0100
Fax: 0131 347 0105

Institute of Financial Planning

The Institute is the professional body that represents those involved financial planning.

Institute of Financial Planning
Whitefriars Centre
Lewins Mead
Bristol
BS1 2NT

Tel. - 0117 945 2470
Fax - 0117 929 2214

Office of Fair Trading

The OFT protects consumer rights and ensures that business compete fairly

Office of Fair Trading
Fleetbank House
2-6 Salisbury Square
London
EC4Y 8JX

Tel: 08457 22 44 99

Consumers' Association

The Association campaigns on key issues related to consumption of goods and services

Consumers' Association
2 Marylebone Road
London
NW1 4DF

Tel: 020 7770 7000
Fax: 020 7770 7600

The Consumer Credit Association

The Consumer Credit Association represents businesses involved in the UK credit industry

Consumer Credit Association
Queens House
Queens Road
Chester
CH1 3BQ

Tel: 01244 312044

MONEY FINDER

This material and any views expressed herein are provided for information purposes only and should not be construed in any way as a prospectus or offer.  Please contact the company concerned for information of any business opportunity or specific program. Before investing in any business, you must obtain, read and examine thoroughly its disclosure document or offering memorandum.

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