The Danger of Excessive Credit Card Debt

Major Advantages of Debt Settlement The largest and most threatening danger of excessive credit card debt is excessive credit card debt. Credit card debt is unsecured debt. In other words, the borrower does not give the lender any collateral as protection against the possibiilty of default on the debt. Since the creditor is taking on more risk exposure than they would if collateral were written into the loan agreement, a higher interest rate is charged to both offset and reward the higher amount of risk involved in the credit card agreement. Bankers love to tout the miracle of compounding interest. In 50 words or less, a savings account established at a 2% interest rate compounding monthly will eventually yield more than 2% interest. The interest is posted monthly to the principal. Next month interest is paid on the principal and posted interest. It will not be a large sum but better than no compounded interest would pay. With any unsecured loans including credit card loans the inverse is true. Unsecured debt does not compound, it snowballs. If a creditcard holder does not pay off the charges within the grace period, interest is applied to the balance. If only the minimum monthly payment is made, pretty soon a large portion of the account balance will be interest. In effect you will be charged interest on the unpaid interest. At this point, the account balance no longer grows at a snowballing rate. It grows at an avalanching rate. This is the time to seriously reduce your credit card balances. Some people seek the help of debt consolidation and settlement agencies. This should be a last resort for credit card holders. Use of debt consolidation services will post to your credit reports and adversely affect them. Only bankruptcy discharges are more detrimental to credit scores. Once you have resolved to reduce your credit card debt on your own, you must stop using the cards entirely. If you have bills that require payment by card, pay by a checking account debit card. Next, you need to pay the minimum plus 20% on each card. Take any more money you can pay towards reduction and pay off the card with the highest interest rate first. After this one is a zero balance, take the money you were paying and apply it to the next highest interest rate balance. Keep repeating this procedure until all the accounts are paid in full.