How harmful is this overall?
Not to harmfull the bacteria lives on all surfaces in the tank and although the filter cartrige has a good chunk you can switch it out if you have to.
If I leave the filter medium in permanentely it will just clog up and slow any filtration whether its bacterial, chemical, or mechanical?
It will clog up beyond help at some point. I've gotten them to last 2-3 months by rincing them in the waiste water from a water change. But sooner or later they just can't go any longer.
Would I be better off getting a seperate biological filter, or some bacteria sponges to put in the filter I already have?
As a former owner of the 29 gallon kit from Wal Mart (only used the tank it self in the end). I slowly replaced all of the equipment that came with it for various reasons. My heater stopped working so I bought anouther from Walmart and it broke after afew months as well. Mind you I have really bad luck

. The filter worked fine but after reading abit I decided to buy a bio wheel style filter. Those have a wheel on the out flow from the filter that holds the biofilter bact on it. You never need to replace the wheel so changing a filter cart shouldn't hurt anything. Something like a Pegiun 330 would fit a tank your size well.
Some people here use only sponges in there filters I'm not to sure exactly what type they use but they have said that they've lasted years with only rincing to get the poo out so to speak. I hope someone can clarify that as I haven't been brave enough to try it. Basically I think they use just a sponge or floss with out the black plastic part. And seriously the general rule of thumb I've heard is you don't NEED carbon (chemical filter) unless you need to get something specific out of the water like a medication after treatment.
If so please list a recommended product.
Tronic heaters have a really good reputation here. I had two in my old tank and they worked great.
http://www.bigalsonline.com/search/...ction=sitebuilder/catalog3-1&keywords1=tronic
I'd recomend anything made by Marineland I'm very happy with their bio wheel filters. I'd look into upgrading to one of these.
http://www.marineland.com/products/consumer/con_penguinfilters.asp
the 330 is what you'd need in a 55 gallon
Or one of these
http://www.marineland.com/products/consumer/con_emperor.asp
the 400 is what you'd need in that case.
Last of all "What do you recommend I do?" :
Don't panic! Or in otherwords relax it'll be fine.
-Neo Sithlord