Types of Consumer Debt
When speaking of consumer debt, there are generally two types. Yes, there are a number of other types of consumer debt that fall into these categories, but it’s best to avoid the confusion and stick with the big two. It will become apparent when reading further, that the other types of consumer debt will become recognizable to those who are struggling to make their monthly payments.
Secured and Unsecured Debt
Depending on whether or not you have collateral, which is security for a loan or other type of credit, separates secured debt and unsecured debt. A secured debt uses collateral – this type of transaction comes in the form of a car loan or a mortgage for a home. If you don’t pay your car loan off or are missing payments on a regular basis, you will more than likely lose your car because it’s the collateral. Credit card debt is the most recognizable form of unsecured debt. You are not putting anything up as security when you sign up for a credit cards – although you can do damage to your financial future if you don’t pay off your debts.
Installment Debt and Revolving Debt
If the monthly debt you owe is stable and will not change, for example a car payment is the same every month; that type of consumer debt is known as installment debt. It is usually more desirable to have that form of consumer debt because there are no secrets or surprises; people are fully aware of what they owe each month.
When dealing with credit cards it then turns into a revolving debt. This occurs because the amount you owe can change month to month, depending on how much unsecured debt you accrue between payment periods. It’s much harder to budget for revolving debt, unless you are a disciplined spender and do not drop your credit card on the counter for every other item that you think you need. It is also much easier for your revolving debt to quickly spin out of control – it only takes a month or two of fanatic spending to realize that you can barely make your minimum monthly payments
Debt Source
When speaking about debt source, it mainly focuses on credit card debt. There are Visas, Mastercard, Discovery, American Express and then there are department store credit cards, gas cards and other credit cards available. The main difference in these credit cards usually comes in the interest rate charged and other payments.
Source of debt may come from high interest rates from a retail credit card or from penalty fees people are paying because they missed a monthly payment. When it comes to debt source, everyone should always familiarize themselves with the fine print that the credit card issuer supplies in their introductory packets. Remember the saying, “the devil is in the details.” A potential credit card user should read everything and leave no stone unturned, because that is where they will learn about interest rates, penalty fees, introductory offers that are suspended after a period of time, and other things that can end up as consumer debt.
Consolidated Credit Counseling Services is here to help. Our credit counselors can give you advice on how to best handle your credit card debt and other unsecured debt. Call 1-800-320-9929 for a free consumer debt analysis.
