Credit debt

Helene Mueller
eCollect support team

Credit debt is used as a collective for defining debts, occurred as a result of credit cards’ past-due payments. Such defaults are “product” of credit cards’ failed payments/ transactions. As a financial interpretation, the term is used in the meaning of all types of debts, granted as a credit by a creditor/ lender. These debts can derive from credit card purchases, consumer loans, business-to-business loans, unpaid medical bills, etc. In the second case, the definition credit refers to the legal contract signed between the first party (creditor) and the second party (consumer/ business organisation) and includes a future date, specifying the deadline for repaying the monetary amount; or a particular date for monthly payment. If examining the general credit debt’s meaning, under this term can generally fall any kind of debt: secured (by a collateral) or unsecured (without collateral), individual (by a consumer) or corporate (by a business organisation), national (within one country) or international (when the debtor’s location differs from creditor’s country of residence).

Credit debt occurrence & classic aspects

If the credit debt refers to a credit card default, the reasons for such debt can vary. As every credit card is a form of borrowing monetary amounts, each consumer is closely monitored. However, there are a lot of cases of credit card debts deriving from unexpected expenses, major events (like a wedding, funeral, etc.), even the so-called “consumer culture” can be a factor. In the last case, the reason might not always be the unwillingness to pay or difficulty in covering the amount borrowed. Sometimes a consumer might have just forgotten that he has past-due payments, which is considered as unintentional debt situation, but the debtor is still obliged to pay the default amount.

When a credit card is used for the purchase of goods, services, etc. an interest rate and percentage charges will apply, which the consumer is obliged to pay. If he prolongs the payment or transfers reduced amounts each month, this will be considered as a credit card debt and the amount recovery will be pursued either by the creditor or by a DCA (Debt Collection Agency) hired by the lender to act on the part of the original creditor. Credit card debts can affect debtor’s credit report in a negative way. If he has fallen behind with credit card payments in the past, future applications for loans, mortgages or even credit cards will be difficult to implement.

When it comes to credit debt as a general meaning, consumer’s credit profile is to be thoroughly checked before granting the monetary sum. This is done by complicated evaluation systems and methods in order to percentage-score the future borrower. These methods define the so-called consumer’s credit worthiness and study individual’s past credit history. But sometimes a credit debt can occur even if debtor’s credit check is good. This can be due to sudden financial loss, e.g. job loss, divorce, unexpected overhead expenditures, and others.

Both credit card defaults and other credit loans are regulated by law acts. In the UK the Consumer Credit Act equalises all types of debts, as long as they are consumer-connected. This act regulates creditors’ and debtors’ rights and controls the whole credit collection process. It describes fair debt collection practices and depicts the unfair debt recovery methods.

Credit debt consolidation

Credit debt consolidation is part of the debt management section. It generally represents borrowing another bigger loan to settle other smaller ones. Usually, this loan is secured by a collateral, so that the creditor has a guarantee that the consumer will not fall into debt again after taking advantage of the debt consolidation. This debt settlement option can be applicable for both consumer and commercial debts, but theoretically refers to and is advisable for credit card debts. This is so because credit consolidation most often includes only individual debts, as consumers use credit card loans more frequently than business organisations do. Such consolidation is appropriate mostly for debtors who are certain that they will be able to keep up with the monthly payments and not fall into another bad debt situation.

Credit consolidation is widely used in the United Kingdom and the U.S., where a convenient payment plan is provided for the debtor, in order to assure that the consumer will be able to keep up with the monthly payments after borrowing a larger amount.

If the consumer decides he cannot afford to use debt consolidation, he can go for other credit debt clearing methods, such as debt settlement, where part of the debt amount is forgiven by the creditor and the debtor has to make one single payment in order to settle the remains of the monetary amount. A subject of debt can also choose Individual Voluntary Arrangements or Company Voluntary Arrangements (for consumers and business debtors) if he is a UK resident; etc.

Used literature & external links