Credit card debt is an unsecured liability from revolving credit card loans that impacts credit scores and requires careful management.
Borrowers can accumulate debt by opening multiple credit card accounts, each with different terms and credit limits. Credit bureaus monitor and record every credit card account owned by a borrower. Most of the debt on a borrower's credit report typically comes from credit card balances, as these accounts are revolving and have no set end date.
Advantages of credit card debt
Credit cards provide various advantages, such as revolving credit limits that can be used as needed. Payments are usually lower than those of non-revolving loans. People can choose to pay off balances to prevent high-interest expenses. Many credit cards offer rewards like cashback or points that can be redeemed for future purchases or to help pay off balances.
Credit bureau reporting and analysis
Credit card debt levels and borrower credit activity are reported to credit bureaus monthly. This reporting allows borrowers to establish a positive credit history over time. However, negative actions like missed payments, high balances, and numerous hard inquiries can harm a borrower’s credit score.
Credit card debt significantly affects a borrower's credit score due to its impact on credit utilisation. Credit reporting agencies monitor every credit account through detailed trade lines listed on a credit report. The total credit card debt is determined by combining the outstanding balances from all credit lines. Credit bureaus use this total to calculate the credit utilisation ratio, which is the total debt divided by the total credit limits of all the borrower's credit cards. Credit card usage is a crucial factor in determining a borrower's credit rating.
Each month, lenders report borrowers' payment behaviour to credit bureaus. Late payments lower credit scores, while timely payments improve them. Paying off large amounts of credit card debt quickly and maintaining low balances can significantly enhance a borrower's credit score.