Different Categories Of Debt Explored

Basically, there are three main categories of debt in which lie six different types. These three categories constitute the whole of the United States’ consumer debt. Within this bewildering realm, it is easy to get lost among the complexities of how debt is reckoned by different creditors. It is very easy for those unfamiliar with even the essentials to be mired technical terminology and legal matters. How can you make it easier on yourself? If you start by learning about the three major categories of debt, you can then build of this foundation to gain specific knowledge in other areas of debt.

First, debt can be categorized according to whether it is a secured or an unsecured debt. Each term is used to express the primary characteristic of the debt you have. What makes the real difference between the two types of debt is whether you have some form of collateral. This is where the idea of having security comes into the picture. For example, if you owe on a loan that security or collateral such as a house or car, either of these may be taken by the lender if you are unable to pay back the loan. Home mortgages are secured debts. Now, if you do not have collateral, you have an unsecured debt. This might include the outstanding balance on a credit card.

Second, you may have what is called revolving debt or installment debt. With these two terms, your debt is categorized based upon how you payments on outstanding debts are paid. Let’s give some examples. For instance, if you have a mortgage or a car payment, the monthly payments are fixed. There is no variation in monthly amount. This is what it means to have an installment debt. If you have credit cards with balances on them, then you have examples of revolving debt. The outstanding balance will change each month depending upon whether you’ve made more or less purchases with the card.

Installments are a safer form of debt because there is no risk of increasing the amount of debt you must carry. You bought a car for a certain price and that stays the same. You are required to remit payments until it is paid off. Revolving debt is riskier simply because you can keep changing the amount through continued spending.

Third, debts can be categorized based upon their specific source. This category is narrower in its scope. An example of this could be credit cards. There are cards issued by different retail stores and those that are issued by financial institutions. It is common misconception to view these different cards as basically the same. Yet, you need to see the differences. It doesn’t matter if it says Master Card or VISA, if your card is issued by retail store, the interest rate will be much higher than you would receive from a bank. Lenders may view each card differently based upon their policies, even as they also review the credit ratings of the cardholders.

These three categories are good entry point. Yet, there are more layers to debt than you may know. It will be beneficial for you, if you take the time to study this more carefully. It could affect your own debt management efforts.

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