Types of Debt

Understand the types of debt you can hold as a consumer.

Not all debts are created equal. There are different types of debt you can hold and which types you have often determines how you should prioritize it and pay it back. By understanding your debt better, you’re better equipped to manage debt strategically and avoid financial distress.

Consumer debt infographic

Managing installment vs. revolving debt

Installment debts are almost always the easier of the two to manage because you have fixed payments. You know exactly how much money you need to pay the debt next month because it’s the same as this month and all months prior.

By contrast, revolving debt payments can increase or decrease based on how much you owe. If you overcharge then your bills can increase rapidly right along with the balances. This makes it more challenging to budget ahead for revolving debts because the amount you’re required to pay may change.

There’s also a difference when you want to make early or extra payments. With revolving debts, you can pay off as much of the debt as you want without penalties. As long as you meet the minimum requirement, you can pay off the debt in whatever way works best for your budget. And the larger the payments, the better; large payments let you eliminate the debt faster, which saves money on interest charges.

Installment debts are different. In some cases, you may actually be penalized for making extra payments or larger payments. These are known as prepayment penalties. In addition, if you want to make an extra payment, you usually have to call the lender to specify that’s what you’re doing. Otherwise, they may just count the extra payment as an early payment for the next billing cycle.

So while you should make every effort to pay more when it comes to your revolving debts, it’s generally acceptable to stick to an installment payment schedule and you should always check with the lender before you deviate from that schedule.

Understanding collateral

Certain types of debt are naturally secured because the collateral is the property you’re purchasing by taking on the debt. So the home is used as collateral when you take out a mortgage and your car serves as the collateral when you finance its purchase with an auto loan.

In other cases, securing a debt with collateral may be required in order for you to qualify. This can be true when you apply for a credit card with bad credit or no credit. If you don’t have a credit score high enough to qualify for a traditional unsecured credit card, then you can apply for a secured credit card. You are required to put down a cash deposit in order to secure the credit line. The line is usually equal to the deposit you make. If you fail to pay the bill once you start to make charges, they can take your deposit.

There are also situations where a secured debt may offer a lower interest rate than an unsecured debt of the same type. For instance, if you want to use a debt consolidation loan to consolidate your debt, with good credit you can qualify for a low interest rate on an unsecured personal debt consolidation loan.

On the other hand, if your credit score is bad, you may be rejected when you apply or the interest rate may be too high to provide the consolidation benefits you need. However, if you’re a homeowner then you can apply for a home equity loan. This is where you borrow against the value built up in your home. It’s usually easier to get approved since the debt is secure. But it may not be worth the risk, since if you fail to pay the home equity loan back you may be faced with foreclosure.

Consumer Debt Statistics

Think you’re alone when it comes to having problems with your debt? Think again. Statistics show consumer debt is a big problem for many Americans – particularly with the current trend of economic hardship in the U.S. There are always solutions, though. You just have to know where to look. Our counselors are here to help. Give us a call so we can get you back on track and resting easy in no time.

Find out where you rate with consumer debt in America

Make an elimination plan that fits the debts you have

If you have a range of debts and no clear plan of how to pay them off effectively, we can help. Call Consolidated Credit today at to speak with a certified credit counselor confidentially at no charge. You can also complete an online application to request your free consultation.