Four Common Types of Debts That People Face

Written By: Indojaa Sathiyaseelan

The Different Types of Debt

At Credit360, we find that debt is a common concern for many people living in Canada. One reason is that people solely categorize debt as money owed to institutions or credit bureaus. In reality, you must be aware of different types of debts to ensure you are correctly managing your debts while protecting your credit score.

Understanding what kind of debt you accrue makes it easier for us to help identify and tackle your concerns while improving your credit score. Here are four primary types of debts that you need to know to guard your credit score.

Types of Debt 1. Secured Debt

Secured debt is when lenders give loans if the borrower offers an asset as collateral if they do not meet the payments. Examples of assets used as collateral are vehicles and homes.

Auto loans are an example of a secured loan. Suppose you finance or lease a car. You technically agree to an auto loan because you agree to make regular payments in return for a car. If you do not fulfill your payments, the vehicle is used as collateral and seized by the lender.

2. Unsecured Debt

Unsecured debt is not insured by collateral like secured debt. Instead, unsecured debt involves lenders reviewing the borrower’s credit history to determine if they are trustworthy and reliable before approving a loan.

Unsecured loans are risks for the lender because there is no way to determine if the borrower will pay a loan, and there is no collateral to support any losses. Due to this uncertainty, lenders will apply a higher interest rate to the loan.

An example of unsecured debt is credit cards. Credit card providers rely on reviewing credit reports before approving a credit card. If payments are consistently missed and go unpaid, lenders will reach out to third-party collection agencies to contact the borrower to meet payments.

3. Revolving Debt

Revolving credit is a type of loan where a borrower can continuously use credit up to the fixed dollar amount while making regular payments to pay a portion of the credit used. Examples of revolving credit are credit cards and lines of credit. Revolving debt refers to the balance used from the revolving credit.

Before approving a revolving credit and setting a credit limit, lenders will typically evaluate an individual’s credit score, current income, and employment stability. There is no date of expiration when it comes to revolving credit. As long as the account remains in good standing, the bank will allow the agreement to continue.

Revolving credit is more convenient than most credit loans, but there is a higher interest rate than traditional loans due to its flexibility. Meaning the borrower must pay the current balance owed along with interest and account fees.

However, revolving credit is riskier to borrow if not appropriately managed. Suppose you have a line of credit and you are dependent on it to make day-to-day purchases. Frequent use of revolving credit will increase your credit utilization (which makes up 30% of your credit score), harming your credit score. So when requesting a revolving credit, ensure to maintain the credit utilization to 30% and below.

4. Mortgage Debt

Mortgage debt is similar to a secured debt because the property becomes the collateral. At the same time, mortgage debt is different from secured debt because there are various types like hybrid mortgages and mortgages that refinance other forms of debt. Mortgages are a type of long term debt that takes decades to pay off. But mortgage debt is a good debt compared to auto loans and credit card debt because the property becomes a high-value asset that you own by the end of the mortgage.

How Credit360 Can Help With Debt

Are you asking yourself how to fix your credit score with the specific debt you owe? At Credit360 we prioritize repairing credit and that means finding a way to fix your credit, no matter what debt you come to us with. Our team of credit repair consultants have over 20 years of experience in credit repair and will work actively to identify the debts you owe and how to fix your credit with minimum effort from you. With our expertise, we can start to improve your credit today!

Originally published at https://www.credit360.ca on October 12, 2021.