Getting to Know Unsecured Debt
Learn more about debts with no collateral and what they mean for your finances.
Unsecured debt can be tricky and it has the potential to be extremely problematic for your budget. On the other hand, the differences with this type of debt offers a unique opportunity for you to reduce debt quickly. This can be useful if you are carrying too much debt and need to reduce it efficiently or face financial hardship.
If unsecured debt is causing problems for your finances, give us a call at to speak with a certified credit counselor. They will review your debts for free and provide options to help you find relief. You can also get started online with our Free Debt Analysis and we’ll call you.
What Makes Unsecured Debt Unique?
Almost all unsecured debts are paid on a revolving payment schedule. This means the amount you owe on your bill each month varies by how much you owe in total. Credit cards are the most common example of unsecured debt. The higher your credit card balance, the more you will be required to pay on the bill each month. This differs from secured debts, such as your mortgage or car payment, where you pay a fixed amount each month regardless of the current size of the debt.
This makes unsecured debts more difficult to plan around in your household budget because there is not a set dollar amount you can list as the monthly payment on your budget. While you know exactly how much money you need for your mortgage, a few extra charges in any given month could easily make your credit card bills higher than expected.
On the other hand, unsecured debt also provides you with a unique opportunity to reduce debt if you are carrying too much debt to handle at your current income level.
Using Unsecured Debt to Your Advantage
Consider a situation where your debt starts to exceed what you can afford on your current budget. As you charge more to your credit cards, the bills on each card go up. Eventually, you reach a point where you have to do things like juggle bills or take out payday loans to try and cover any shortfalls. However, while unsecured debt is the problem, it also provides a means for you to get back on track.
If you can create a strategy to reduce debt quickly by focusing all of your extra cash flow on reducing one unsecured debt at a time, you decrease the amount you are expected to pay each month. This helps adjust your debt-to-income ratio back to an acceptable level, where your monthly obligations are in line with your monthly income level. This only works with unsecured debts, because secured debt payments are fixed and don’t change regardless of what you owe.
Consolidating Unsecured Debt
If you cannot make a strategy to reduce debt on your own, unsecured debt may still allow you to find a way out because you can consolidate. Most secured debts (your current mortgage, auto loan and student loans) cannot be consolidated using any debt consolidation option. By contrast, unsecured debts can usually be consolidated to combine multiple debts into one low monthly payment. You may be able to reduce your unsecured debt payments by as much as 50%, depending on your circumstances and which debt consolidation option you choose.
If unsecured debts are causing problems for your finances or you need help creating a strategy to reduce unsecured debt, give us a call at . A certified credit counselor will review your debts for free and help you find a way to get back on the right path with your finances. You can also get started online with a request for a Free Debt Analysis.