What Exactly Is Credit Card Debt?

About 56% of American adults say they have credit card debt, according to a recent survey by Credit.com — but do they, really? What does it mean to be in credit card debt?

It sounds straightforward, but people define credit card debt differently, as was indicated by responses to the Americans and Credit Card Debt survey conducted online Jan. 1 to 9. When asked for the primary reason behind their credit card debt, several of the 2,223 respondents explained they pay their balances in full each month, as opposed to using the card as a financing tool for large or unexpected purchases. Whether it’s the convenience of card over cash or the ability to earn rewards on credit card purchases, these consumers are taking the debt-free approach to credit card use.

Technically, yes, they owe money until they make the monthly payments, which is seen as debt. After all, it just takes one exorbitant bill or unexpected expense to push a debt-free card user beyond his or her ability pay in full, and then they’re in the hole, accruing interest. Defining credit card debt comes down to identifying the true cost of credit cards, which will vary based on the cards you have and how you use them.

Debt and Credit Reports

It’s all about perspective. Cardholders who pay their balances every month may look at their behaviors and say they live debt-free.

“I don’t consider them to be carrying credit card debt,” said Michael Bovee, a Credit.com contributor and debt-management expert with the Consumer Recovery Network. “Now, on the credit report, that might be a different story, depending on when their credit reports are updated.”

What he’s saying is that even though you can afford every purchase made on your credit cards by the time the bills come due, you still have to think about how those purchases impact your overall credit health.

Even if you pay your balances in full every month, your credit reports could show you have credit card debt, if you’re a regular credit card user. (Or you could use a credit card and pay it off ASAP using online payment services — some people do that — which is about as debt-free as you can get as a credit card user, practically speaking.)

Assuming you’re making one or two payments a month, the recorded amount of your credit card debt depends on when the card issuer reports to the credit bureaus: If they happen to report right before or after you pay that month’s bill, your balance may be very high or low. You may not be accruing interest on that debt (a good thing), but the proportion of that balance to your available credit will impact your credit scores (you can see exactly how this works using Credit.com’s Credit Report Card to analyze your debt load — for free). You may be able to afford a $2,000-a-month credit card bill, but if your credit limit is only $4,000, you’re hurting your credit scores by keeping a high credit utilization rate.

Building Credit Does Not Require Debt

Credit cards and debt are intertwined but not inseparable. There’s a common misconception that you can only build credit by going into debt, but you can build a great payment history by using credit cards, and it won’t cost you any more than it would to make those transactions with cash or a debit card.

Actually, credit cards can save you money, if used strategically. Rewards that translate into airline miles, cash back and a variety of other perks can make your everyday purchases more valuable, as long as the reward outweighs the cost. For instance, you’ll want to make sure your savings offset any annual fees associated with rewards credit cards, and you have to make sure you’re not overspending just to get rewards. These cards tend to carry high interest rates, which negate the long-term value of the rewards if you don’t pay the balances in full.

That’s not to say carrying a balance on a credit card is irresponsible: Credit cards can be a fantastic tool for spreading the cost of a large purchase over a longer period of time, and cards with low or promotional interest rates can be especially helpful for such expenses. But it depends what you’re financing.

“A lot of people never stop to think about the true cost of credit,” Bovee said. He gave the example of using credit cards to take advantage of discounts, like those during the back-to-school shopping season. If you’re buying more than you can afford to pay off in that billing cycle, are you really saving money with those deals? Maybe not.

Debt as an Attitude

When it comes to the type of people who find themselves in credit card debt, Bovee said very few consumers set out to use credit cards irresponsibly, in his experience. Attitude is the real difference between people who use credit cards without issue and those who fall into cycles of debt, he said.

“Predominantly, it’s the individual that’s optimistic, if I can boil it down to one thing that people tend to share in how they’ve run up those bills to triage stage,” he said. “They were overly optimistic for too long.”

It starts as the extra $100 spent shopping during the last billing cycle, and you think, “I’ll catch up in next month’s budget.” That $100 grows with interest, and maybe you don’t cut back as much as you should the next month, either. The idea that you can always catch up leads to the pit of debt, and even carrying that little bit of extra debt can be a huge blow if you lose your job or encounter an unexpected emergency.

Does that mean the debt-free are a bunch of pessimists? Not necessarily. It comes back to the concept of understanding the cost of credit and maintaining realistic expectations of what you can afford. From Bovee’s perspective, if your attitude is “I’ll figure it out later,” don’t be surprised if the bills are tough to tackle later.