What are the effects of credit card debt?

Do you mean how it effects your credit score? Your financial well-being? If you mean your credit score, it is based on credit utilization. The more credit you are using based on how much credit you have available, the more it is going to negatively affect your credit score. Example – If you have $50,000 in credit, and you are using $5,000 of it, you are going to have a better score than if you are using $35,000 of it. Also, payment history and age of accounts also affect your credit score.

Now, if you are talking about actual financial well being, the more credit card debt you have, the more you are putting your current resources towards paying that debt versus other things, like investing for retirement. So, it has a direct negative effect on your financial future.

Bankruptcy in some cases can actually help peole with their credit. Companies realize that a person who files bankruptrcy no longer has any debt, so they are good candidates for new debt.

Hope this helps.

That is really a very broad question, so I will focus only on the effects that bad credit card debt has on your credit file and some of the potential consequences. By bad debt I mean the outstanding account balance on which even the minimum payments have not been made.

There are stages in the delinquency of credit card debt. If even the minimum payment has not been made for up to 90 days, the account will be still at the card issuing bank. It will be reported in your credit file simply as a late payment and it will be specified how late (30, 60 or 90 days). Your credit worthiness is slightly damaged and your credit score will drop a little bit.

If no payments have been made for more than 90 days, the account will be “charged-off”. This refers to a debt, declared to be uncollectible and removed from the bank’s balance sheet. Once charged-off, the account is sent to a collection agency and reported to the credit bureaus as a charged-off account. This is a lot more damaging than being late on a payment and your score will drop substantially.

The collection agency usually has the account for no longer than 60-90 days and their settlement parameters are very rigid. Typically they will not accept a settlement for an amount smaller than 80%-90% of the outstanding balance (including interest and other financial charges).

After 60-90 days, the bank will recall the account from the collection agency, place it in a pool of charged-off accounts, that have already gone through the same cycle, and sell it to a debt buyer. A typical bank sells such accounts quarterly.

Once a debt buyer gets the account, they become the new creditor and can report the account again to the credit bureaus. So 1 account can generate several derogatory notes in your credit file, each one further damaging your score.

If it remains unpaid, the debt buyer can and will sell the account to another debt buyer and the story will repeat itself.

The earlier in this cycle the account is paid, the better for the credit history. It will be updated as a “paid collection” account, which is a great deal better than showing as a collection account. Yet, it will take time for the credit score to get back to where it was before the delinquency.

There is a lot more to be said, but I don’t think I can cover it all here.

You can review for your research the Fair Credit Reporting Act.