Credit Debt

Introduction to Credit Debt

“One of the greatest disservices you can do a man is to lend him money that he can’t pay back.”
- Jesse H. Jones

While this quote has some truth in it, without the modern credit & debt system, most societies would have a tough time functioning efficiently.

After doing some research into keywords to focus on for this site, we’ve noticed that “credit debt” is a popular term. So, we’re going to cover this concept below as best we can. And “credit debt” might be considered repetitive if you think of it as just a more descriptive term for debt.

If you’ve come to this page, we can only think of four reasons that you might be interested in credit debt.

1. You may have made a typo and are really trying to learn accounting related concepts like “credit debIt.”

2. Or, you may be looking for credit and debt as concepts related to larger economic issues like 2008’s credit crunch. This also includes international issues like governments’ budget and current account deficits, which can generally be thought of as debts of one sort or another, depending on your viewpoint.

3. Or, you may be looking for meanings of the independent concepts of credit and debt and what their definitions are. You might be trying to figure out how these terms relate to each other.

4. Finally, you may be looking for info on credit card debt and how to manage it.

For #1, if you are looking for accounting related terms like “credit/debit,” we’d first tell you that debit is spelled with an “I”- debIt. It. There are many sites covering accounting related phrases like this. Just do some googling for the term “credit debit.” Here are a few links for all you people with spelling difficulties out there:

1. (Google search for Firefox users) http://www.google.com/search?q=credit+debit
2. (Google search for IE users) http://www.google.com/search?hl=en&q=credit+debit
3. http://en.wikipedia.org/wiki/Debit

And, good luck on your CPA exam!

For #2, there are myriad blogs focusing on the credit crunch and the macro economic issues that have recently affected the US. In fact, this is our favorite blog related to topic #2:

http://calculatedrisk.blogspot.com/

Given that the focus of our site is on personal bankruptcy, we’ll try to focus this credit debt discussion on points #3 and #4.

P.S. Please accept our humble apologies if there is another concept you are looking for related to credit debt. Just leave a comment below as to what you are after. We can later make a followup post to provide what you are looking. Comment away!

So, let’s begin with our discussion of credit debt as it relates to most people’s day to day lives.

What is Credit?

According to Investopedia, one of the definitions of credit is:

A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company.

http://www.investopedia.com/terms/c/credit.asp

In other words, credit is the ability to borrow money, goods or services and pay for them at a later time. The word to key in to here is “ability.” This ability is considered credit.

We use credit all the time. Here are some examples of credit that most of use in our day to day lives:

1.When you eat lunch at a sit down restaurant.

2.When you drop your clothes off at the dry cleaners.

3.When you use a credit card to buy a new bicycle.

4.When you turn your lights on in your house.

5.When you borrow your neighbor’s lawnmower.

In all of these situations, you have been extended credit, though you don’t usually realize it. Let’s take a look at each one.

In #1, the restaurant allows you to eat your lunch before paying, therefore they’ve extended you credit- the value of your food- until the meal is over.

In #2, the dry cleaners clean your clothes and you don’t have to pay for the cleaning until you pick up your clothing.

In #3, the credit card company has extended you credit to the amount of the bicycle.

In #4, the power company sends you a bill for the amount of power you used last month- they let you consume electricity on credit.

#5 is a little different case, but it makes for a great example. In #5, your neighbor lets you use his lawnmower on kind of an informal credit arrangement. He probably doesn’t expect payment for the use of his lawnmower. But, he definitely expects to get it back.

However, for purposes of this discussion, let’s focus on money as what is being borrowed.

The restaurant example above is discussed in greater depth below…

What is Debt?

OK, so far, so good. Once someone has borrowed money (or bought something) based upon the credit that was extended them, the amount owed is now magically transformed into “debt.” The obligation is debt.

Here’s the definition of debt from Investorwords.com:

An amount owed to a person or organization for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements. These different forms all imply intent to pay back an amount owed by a specific date, which is set forth in the repayment terms.

http://www.investorwords.com/1313/debt.html

That definition might be a little long for practical purposes, so let’s get a 2^nd opinion. Debt can also be thought of as:

n.

1. Something owed, such as money, goods, or services.

a. An obligation or liability to pay or render something to someone else.

b. The condition of owing: a young family always in debt.

2. An offense requiring forgiveness or reparation; a trespass.

[Middle English dette, from Old French, from Vulgar Latin *dēbita, pl. of Latin dēbitum, debt, neuter past participle of dēbēre, to owe.]

http://www.answers.com/topic/debt

Let’s go back to example #1 from above. When you go to lunch at a sit down restaurant, you are given credit until the meal is finished. Once the meal is finished, you, ever so briefly, may be considered to have incurred a debt for the food consumed. You owe the restaurant payment for the food. After paying, the debt is extinguished. If you pay in cash, the transaction is now complete.

To extend this example, let’s say you charge the lunch on your credit card. In this case, a multipart creditor debtor situation arises. First, like above, the restaurant owner extends you credit for your lunch by not making you pay until you leave. But, if you charge the lunch on your credit card, two things happen:

1. The credit card company now owes the restaurant a debt for the amount of your lunch because the restaurant may not receive real payment from the credit card company for 30 days or more. In effect, the restaurant has extended the credit card company credit for your lunch. This is a little confusing, we know. Read it over a few times & you should get a little better understanding.

2. You now owe the credit card company a debt for the amount of your meal because the credit card company extended you credit for your lunch. After you pay off the balance, the debt goes away.

Similarly, when a consumer borrows money for a new car, for example, the amount borrowed is generally considered “debt.”

Now that we’ve covered both the concepts of credit and debt & briefly mentioned how they relate to each other, this should satisfy anyone looking for basic credit & debt definitions. In other words, this information should help out anyone who is looking for information related to #3 reason above.

What is Credit Debt?

As stated above, “credit debt” may be considered repetitive because most debt, if not arising from a lien or court proceeding, results from an extension and use of credit.

Hopefully, what you are truly looking for is something that we’ve written about previously: credit CARD debt. It may be the case that you are just abbreviating “credit card debt” to be “credit debt” So, let’s tackle this subject next.

Credit Card Debt

We wrote a substantial post related to credit card debt a little while ago. When printed out, the post is roughly 10 pages along, and we think it’s one of the best discussions of credit card debt online. Seriously.

But, let’s do a quick review of credit card debt here so that we cover all our bases.

To begin with, credit card debt is what consumers get when they run up tabs for purchases using credit cards. Some businesses also use credit cards, but we will focus on consumer debt for this post.

The credit card industry has grown during the last 20 years. Some estimates put the global credit card market at more than 4 trillion dollars. Trillion! And, entire side industries have developed right along with it like debt consolidation and credit card rewards programs. For consumers who pay off their balances in full each month, rewards programs can provide excellent bonus’ like free hotel stays, gift certificates, and airplane tickets.

The size of the total consumer debt grew nearly five times in size from 1980 ($355 billion) to 2001 ($1.7 trillion). Consumer debt in 2008 now stands at $2.6 trillion.

http://www.money-zine.com/

As we stated in our previous post about credit card debt, some studies estimate that the average US household now carries $9,840 in credit card debt. But, it’s hard to gauge the accuracy of that number because many consumers pay their credit cards off entirely every month. Related: see these 2 articles that refute the methodology used in getting $9,840 per household:

http://moneycentral.msn.com/, http://consumerist.com/

And, there have been many reports that senior citizens are filing for bankruptcy in increasing numbers these days. It’s always been hard to get firm data on who’s carrying how much credit card debt. But, go to your average mall on a Saturday & watch people spending money. All those purchases can’t be paid off in full every month, can they?

Regardless, the levels of consumer debt relative to disposable income are alleged to have increased dramatically during the last 20 years. Take a look at this chart to see (we used this chart in our other credit card debt post too, but it bears repeating):

If that information is accurate, people are carrying debt loads at 110% of their disposable incomes. So, what does that mean? Probably that, unless they receive raises in the future, they will have a hard time paying their balances off. The data for this chart can be found over here.

Also, The Fed posts great current information about consumer credit in the United States at any given time:

http://www.federalreserve.gov/releases/G19/Current/

As stated above, we covered credit card debt in depth before. Read the fully story here: http://www.bankruptcyaccess.com/credit-card-debt/.

Top 12 Credit Debt Websites

Here are 12 of the best websites we could dig up related to credit, debt, and credit card debt. Depending on your interests, pick and choose. They are in no particular order as they are all 1^st class resources. Drumroll please!

1. FTC.gov
   
2. CreditSlips.org
   
3. MyTwoDollars.com
   
4. CreditCards.com
   
5. Bargaineering.com
   
6. Money-zine.com
   
7. BankRate.com
   
8. Credit.About.com
   
9. WiseBread.com
   
10. Mint.com
    
11. MyMoneyBlog.com
    
12. TheSimpleDollar.com
    

Conclusion

This discussion of credit debt has hopefully shed some light on different topics related to credit and debt. And, like we said above, if you have any ideas of what else this should include, comment below. Given the somewhat ambiguous nature of the term “credit debt,” we’re interested in hearing whether or not we are on the right track with this post and would certainly appreciate the feedback.

See also:

http://www.usnews.com/

Thank you for reading our discussion of credit debt.