There are 2 financial concepts that are usually close to each other and these are unsecured debt – credit cards. This is because the unsecured debt is related to a high-risk action for lenders, and it is unfortunate that many borrowers take advantage of this situation to apply for loans and not pay them.
In fact, many people are known to have credit cards and do not cancel them, just because they know they did not compromise any collateral.
You don’t want to be one of those. What you want to do is learn how to use a credit card and avoid unsecured debt. And in case you fall into it, you must take responsibility for it with great peace of mind.
After you’ve read this article you will know:
- What is unsecured debt?
- The link between credit cards and unsecured debt.
- How to pay off your debt.
- How to properly use a credit card.
This refers to loans that are not backed by collateral. If in any way the borrower defaults on the loan, the lender may not be able to recover his investment, because in this case, it is not necessary for the borrower to guarantee a specific guarantee or endorsement as collateral for the loan.
The unsecured debt is classified as dangerous, and much more when the interests are usually quite high.
These unsecured loans are much like credit cards, medical bills, utilities, and other instances, where the borrower offered nothing as collateral in the event of a default.
These are particularly high risk for lenders, as the borrower may decide to simply stop paying the installments and leave the lender bankrupt. In this case, the lender tries to sue for the money he borrowed to be repaid.
However, since there were no specific contracts within the guarantee, it is very possible that the lender will not recoup their initial investment.
The borrower, when declaring bankruptcy, can stop paying their outstanding debts. However, this has many consequences. As a result, it is practically impossible to get new loans in the future, since bankruptcy has a negative impact on the credit score, this can last for years.
While the lenders look for different methods to be able to recover their investment there is not a perfect way to ensure this. Although there is room for a lawsuit, lenders can report any case of debt or bankruptcy status to other agencies.
On the other hand, the lender can hire a credit collection agency to help him recover the money that he had lost.
Not really, they are not linked. Although yes, credit cards are a type of unsecured debt, they are not primarily linked. A credit card represents a loan without risk for the bank or for the institution that grants it.
As mentioned above, credit cards do not have any type of guarantee from the borrower, which represents a very high risk and a double-edged sword for the user. Not paying will have consequences.
For Americans, credit cards are one of the biggest financial and debt nightmares. In a survey made back in 2019, it was determined that 52% of the respondents have debts of more than $10,000.
They are canceling this debt with interest rates of up to 30%, this rate depends on the type of loan you have requested. Some of the interest is usually higher than the amount that was originally requested.
Having a credit card is usually a huge advantage, as long as it can be easily paid off. With each payment, or installment, comes the interest, some of them even have compound interest. What this means is that interest is paid on a balance that includes interest charges from the previous month.
With compound interest, you fall into a spiral debt, very difficult to get out of.
There is not a 100% bulletproof way to pay off your debt. But here we have some suggestions that you could follow to make it easier for you.
- Identify what prevents you from canceling it completely.
- Determine if you have room for improvement in those areas. You must automate your finances so that it is easier for you to cancel your debts.
- Apply for a debt consolidation loan where the number of creditors is reduced and you will have a lower interest rate, and a lower monthly payment.
- Request a credit card for a balance transfer, where you can get excellent credit. These cards often come with a 0% APR for up to 18 months.
- Obtain credit counseling; no matter what moment you are in, it is never too late to correct the bad decisions of the past, and today you can start taking the right step. Get started asking for help from a financial professional.
These suggestions could drive you through a tough time setting your finances straight.
Sure you are very excited because your new card was approved, but you must control your emotions and not get carried away so much. Credit cards are good tools but they can leave you in a pretty awkward situation if you don’t know how to use them.
- Try to keep your balances low. This will help you make payments easier and also reduce the amount of interest.
- Use less than 30% of your credit card’s limit. Lenders see this as a good credit signal.
- Pay your invoices on time. With this, you will be calmer since you will accumulate less money.
- Control your credit card movements to avoid fraudulent purchases or identity theft.
- Use the card only in a pinch. Like when you need to make purchases that are really important. Going to eat outside, buying some shoes or a new phone can be important, but not as much as a medical emergency or something similar to that.