How Do You Categorize Debt

For most intents and purposes, there are three essential categories of debt that are recognized by lenders, creditors, and consumers in the United States. Beneath these three categories are all of the other types of debt. At this point, matters become more confusing as debt takes a variety of shapes based upon the individual. For the purposes of this article, it will be enough of an introduction to identify the three basic debt categories and explain them in some detail.

Debt is often categorized based upon whether it is secured or unsecured debt. What does each of these terms mean? Essentially, the difference is based upon the presence or availability of collateral, which is the security on the loan or other form of credit. If a debt is secured it means that collateral was involved in the process. For example, if you owe on a loan that was purchased using security or collateral such as a house or car, you have a secured debt. Car loans and home mortgages are secured debts. Credit cards are the most common form of unsecured debt although if you obtain an unsecured loan from a bank or other financial institution, the amount owed will be unsecured.

Next, debt may be categorized as revolving debt or installment debt. The factor that determines if the debt is one or the other is the payment schedule. What way are you paying on your outstanding debt? Let’s use the example of a car payment or a mortgage payment. The payments are fixed at a certain amount every month and the total amount of the loan does not change. These are installment debts. If you have a credit card with a balance on it, you understand that the balance will change or fluctuate depending upon how many purchases were made with it during a specific period. This is what it means to have a revolving debt. The total amount that you owe will always change.

When it comes to the question of safety and stability, installment debt is a preferable form of debt because there is zero risk of increasing the amount of debt you have. Again, if buy a car for a specific price, there is should be no fear that the price will change the next month. It is established once and for all.

Finally, your debts may be categorized according to their sources. The best example of what this distinction means can be seen in the different types of credit cards that are offered. A card may be issued by financial institutions, department stores, online services, etc. Now, although many of these sources offer the same types of credit cards such as American Express, VISA, or Master Card, there may be differences between them based upon who distributes them.

Probably the most common factor is interest rate. The rates offered by retailers are often higher than you would receive from a bank or other provider. There may be others distinctions depending upon the issuer but you get the general idea. You should know what these differences are before you apply.

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