1. What is credit card debt?
It is an unsecured financial obligation to one or more banks or companies that issue consumer credit cards, resulting from purchases or advances using the card that have not yet been paid back. No collateral is required for credit card borrowing, but interest rates tend to be higher than for other types of loan, and severe late payment penalties may apply. While, technically, all purchases made by credit card create a debt to the user, these debts typically do not incur interest until the grace period has expired. Thus, credit card users who pay off their balance each month are generally not considered to have credit card debt. Rather, the term applies to users who continue to carry a balance on …show more content…
The credit limit is pre-determined by the card issuer based on the cardholder's credit rating and credit history.
When an individual uses a credit card to make a purchase, he or she is authorizing the credit card issuer to pay the merchant on their behalf. Merchants are required by law to verify that the individual using the card is its rightful owner by obtaining proper identification via a Personal Identification Number (PIN), and/or a driver's license or state-issued ID card.
Merchants generally prefer payment by credit card because they are immediately paid by the card issuer – despite the fee the merchant must pay to the card processing company for each transaction.
Credit card issuers require the cardholder to pay his or her balance in full, usually on a monthly basis. If the user does not pay the balance in full, the issuer adds interest to the balance, and this interest compounds for as long as the balance is outstanding.
As with credit limits, the cardholder's credit rating and credit history can influence the interest rate on the card. In some cases, the issuer can raise the interest rate. There is no federal limit on the interest rates credit card issuers can charge, although many states impose different caps. Many card issuers offer "teaser rates" that start out very low and increase over