Types of Debt

There are literally two kinds of debt.  Secured and unsecured.  A proper balance of the two is the best way to approach your credit. Examples of secured debt are houses, automobiles, and boats. The loan with the bank is secured by the property, the automobile, or the boat and should you default on the loan they’ll want the security collateral back. This is, as you know, a home foreclosure or car or boat repossession.

The most common types of unsecured debt are from credit cards. Almost every single consumer in the United States has one or two or maybe even more because they are simply so easy to obtain. Virtually anyone with a social security number can get one. Other types of unsecured debt are signature (personal) loans with a bank or credit union, utility and cell phone bills, medical bills, department store cards, student loans, a deficiency balance from an abandoned apartment or rented home, or the balance left over from a home foreclosure or car repo.  While the home and car started out as secured loans, once they are in default and repossessed by the bank the remaining (deficiency) balance now becomes unsecured debt.

A good balance of both types of debt is required for a well rounded credit report. For most Americans, a home mortgage,  auto loan or two, and a few lines of unsecured debt make up their credit report. This is fine as long as the unsecured debt is kept on a leash. Credit damage occurs when the income remains constant and the credit card debt becomes out of control. This creates the upside down effect, or more income going out than you have coming in. When this happens the correct way to rectify the problem and improve your credit report is to eliminate the credit card debt.