Nobody likes to be in debt. But a lot of Americans don’t realize how much debt they are really in. This is because people like to package normal consumer debt with fancy words to hide what it really is. This is also because a lot of people are not really educated about debt really is and what all comes under the word ‘debt’. Here is an interesting figure, an average American has about $34,055 in debt.
Banks don’t like using the word ‘debt’ as it will stop or discourage people from taking loans or buying that new house or that new car. In this article we will go through a brief definition of what debt really is and what are the major types of debts out there.
WHAT IS DEBT?
It’s simple, if you owe money to someone, be it anyone, you are in debt. It doesn’t mean that you have to strictly borrow money from someone to be in debt. Even if you buy that car or house using a loan from the bank, it means you are in debt. Think about it, you don’t really own the house until you pay off that home loan, if you keep defaulting with your payments the house will go to the bank.
Even if you borrow money from a close family member to give that down payment for that house, you are in debt. In general, you should avoid being in any kind of situation where you have to keep paying off someone. That’s why a lot of successful say that you should only buy things you can afford and not try to finance things before you have the money.
The word ‘secured’ here does not mean its secure debt for you, it represents the interests of the lender. When you buy a car or a house or any household items by financing it through a lender or a bank, then that object is tied up to that loan. If you fail to make timely payments, you will end up losing whatever you finance.
This means that the amount which was lent by payday lender is secured by that object, that object will also be known as the ‘collateral’. In these types of loans, the interest rates are generally lower as the person or the bank has a sure shot of getting their money back.
This type of loans are best for lenders as you end up paying more than the actual costs because of interests and it is extremely low risk for them.
You can probably guess what this means. Whenever you borrow money for personal needs which has nothing to do directly with a particular object, its an unsecured debt. This includes credit card bills, student loans, medical bills, payday loans and any kind of personal loans.
As you can probably guess, this type of loans is much riskier for lenders, they make for this my increasing the interest rates.
This type of debt is very dangerous for someone who is not careful. As you don’t realize that the debt is piling up as it is not tied up to an object. If you get a car loan, at least you know that if you don’t pay the car will be taken away.
You can compare this to a vicious cycle. You end up borrowing money, only to borrow more money. This might seem like a very stupid thing to do but a lot more people are involved in this than they realize. Most of the credit card owners end up being in this kind of debt.
Think about this for a moment, you end up reaching the maximum limit on your credit card, but you pay off the minimum amount required to pay that month. This means you can again use your credit card next month. And this cycle continues giving an illusion that you have your credit score under control. But this all will fall like a house of cards if you end up missing just one payment. Even if you don’t miss on payments, the interest on the rest of the amount keeps piling up and before you know it, you owe more to the bank than you earn.
WHY YOU SHOULD FOCUS ON YOUR CREDIT RATING
If you were born during or after the 90s then you probably lived through coming up of Facebook when you were in college or school. Do you remember how some people used to judge you based on the number of followers or friends you had? Well consider having a credit score as the number of followers you have. But in this case, the people who are judging you for your rating can either make your life better or worse in a very serious way.
For people who are not educated about the financial world won’t think much of their credit rating when they are young or just starting out with a job. They would think how bad can one missed payment be? Let me show you how your credit rating can affect your life in the future.
YOU NEED A GOOD RATING TO GET UTILITY SERVICES
If you are moving from one place to another, you will need to get new connections for all your utilities. This process can be much cheaper if you have a good credit score. Utility companies will ask for big deposits before turning on the services for people with a bad credit rating. Its kind of like a safety net for them, in case you don’t pay on time.
You save these $100 or $200 payments by having a credit score. These payments add up to a lot when you take the entire expense of moving into account.
Your credit score or rating is like your ability to manage finances summed up in one number. If anyone wants to give you a house for rent or give you a house loan will see your credit score as a judge of character. This character will determine the likelihood of you repaying that loan or paying the rent.
If you have a lower score two things will happen, either you won’t get a loan, or you will get a mortgage with much worse conditions. These conditions include adjustable rates, higher interest rates etc. even if you are just looking for an apartment on rent, the landlord will be hesitant to give you a house if you have a bad credit score.
Your credit score will even help you out when looking for a payday loan. Bad credit loans have extraordinarily high interest rates, have you seen adds for payday loans online no credit check instant approval? The reason why they don’t check your credit is because most of the people who will go to them have been rejected by big banks because of their credit scores and this means that lenders can take advantage of desperate people and charge high interest rates.