There are many financial experts and commentators expressing concern about the level of credit card debt and its potential to make the current economic situation significantly worse. Some envision a bubble burst similar to the housing bubble, with pure destruction wrought by credit default swaps and other financial instruments similar in nature to those associated with the mortgage and lending meltdown, such as mortgage backed securities and the like, and others point to the additional potential of massive defaults due to the current economic situation. Some financial watchers fear that a devastating combination of the implosion of the financial instruments based on credit card debt and borrower default is just over the fiscal horizon.

Recent Credit Card Debt Record Breaking

Americans have set records for personal debt, records many are feeling the burden of quite heavily these days. On June 10, 2008, CardTrak.com reported that "consumer revolving credit resurged in May as Americans tacked on $5.6 billion in net new debt, mostly credit card debt," driving revolving consumer debt to "a record $961.8 billion."

With the turmoil in the banking and related financial industries, credit card issuers - often entities that have already been slammed by losses in the mortgage industry and by losses in mortgage related investments - are getting nervous. So, too, are investors, according to an October 1, 2008, Market Watch report.

"Shares of the nation's largest credit-card firms were hit by volatility Wednesday as investors weighed the effect of a slowing economy or even a subprime-like crash of personal credit defaults," reported market Watch. The top credit card companies stock share prices endured significant fluctuation, an indication of the uncertainty and fear felt by investors today.

There's A Lot Riding On Credit Card Debt

There's much more to the credit card debt situation than individual consumers making their payments. Credit card debt is different from other types of loans because it is unsecured debt, meaning not backed by collateral and, thus, there's a bit more risk involved for lenders. According to an article in Newsweek Magazine, published September 27, 2008, however, in 1994, a group of JP Morgan bankers came up with a plan, a solution of sorts to the risk associated with the unsecured lending of credit cards.

"What the bankers hit on was a sort of insurance policy: a third party would assume the risk of the debt going sour, and in exchange would receive regular payments from the bank, similar to insurance premiums. JPMorgan would then get to remove the risk from its books and free up the reserves," explained the Newsweek article. And, the credit default swap was born. This financial instrument quickly attracted numerous investors as it seemed "the safest way to parse out risk while maintaining a steady return." This, interestingly, was the model that the mortgage backed securities and other financial instruments that were to come shortly thereafter were based upon.

Warren Buffet is widely quoted as referring to credit default swaps as "financial weapons of mass destruction." That is because their trade is unregulated, as these are private deals, and because as they are traded, they become increasingly leveraged, until it becomes exceedingly difficult to pinpoint what these financial instruments are really worth. Furthermore, it is often the riskiest of debt that is sliced and diced and packaged up for sale to investors, and there was a lot more of that risky debt, because once the lender didn't have to worry about the risk, they were significantly freer with their credit.

So, if there is a significant increase in the rate of credit card debt default, there will be serious repercussions felt not just in the world of banking and lending, but also throughout the investment realm. This particular type of financial vehicle is held throughout the world, not just by individual investors, but also in group investment situations, and even by local and state governments. Furthermore, as the Newsweek article pointed out, many lenders have become "tethered together" through this wheeling and dealing, meaning that should a financial calamity occur to one, the effects can be quite broad, affecting those that have dealings with the lender in trouble.

The Whole World Is Watching

With the precarious nature of these sorts of financial dealings made quite clear by the mortgage and lending crisis and the housing market meltdown, it is no wonder that the whole world is watching the credit card debt situation and that investors are feeling leery and unsure. As other avenues of credit dry up - home equity loans, and the like - and day-to-day living costs soar, people are increasingly turning to their credit cards, and the debt is mounting up. Credit card companies are bracing themselves for the potential of widespread defaults as they see delinquencies creep upwards.

The potential for a credit card debt crisis is certainly present. The repercussions to the economy of the United States, and that of the world, could very well be quite serious. With as many of the top financial institutions as there are still reeling from the aftermath of the mortgage and lending crisis, a similar scenario in the credit card debt realm could easily shake the entire system to its very foundations, likely leaving a significant number of lenders in a pile of fiscal rubble.