Credit card companies offer consumers in Michigan and around the country revolving rather than installment debt. It is called revolving debt because the credit limit becomes available again after the balance is paid, which means consumers can borrow the same money again and again as long as they make all of their payments. Revolving credit arrangements are very convenient for consumers, but that flexibility comes at a high price. Credit cards have far higher interest rates than installment loans, and fees and penalties can add up quickly when payments are missed or submitted late.
Credit card benefits
Credit cards are very popular with consumers because they are so easy to use. There is no paperwork to fill out, and transactions are usually approved in a matter of seconds. Credit cards also offer consumers low monthly payments despite their high interest rates. This is because the minimum monthly payment is usually less than 2% of the outstanding balance. Installment loan payments are high because they include both interest and principal. The minimum payments sent to credit card companies are made up almost entirely of interest. Credit card companies also offer consumers buyer’s protection and perks like air miles or bonus points.
Credit card pitfalls
The credit card debt trap is a term financial experts use to describe what happens when consumers suffer financial setbacks and turn to revolving debt to cover basic necessities like food and utilities. This makes financial situations completely unmanageable, and bankruptcy is usually the only escape. Current financial data suggests that millions of Americans have fallen into this trap. The average credit card balance has grown by 13% since 2021, delinquencies are at their highest level in four years and credit card companies are charging off billions in bad debt.
Escaping the trap
Escaping credit card debt is not easy because high revolving debt balances drive down credit scores and make borrowing more difficult. The nation’s bankruptcy laws were written to provide fresh starts, and they are often the only way out.
