Understanding the types of credit can help you better manage your debt.
Secured credit includes loans or lines of credit that are secured by either the item being purchased, like an automobile, or secured by some other form of collateral, like your home. Secured credit will almost always have lower rates than unsecured because the lender has less risk since they have a lien on the item securing the loan. If the borrower falls behind on payments, the lender can take possession of the collateral.
Unsecured credit has no collateral – so the lender has more risk, making the rates higher than you’ll find on secured credit. Credit cards are a very common example.
Managing Credit Card Debt
Credit cards can provide a great source of easy and immediate credit – when used wisely. However, many consumers have learned the hard way that it is easy to charge well beyond their ability to pay. A report from creditcards.com indicates that 97% of consumers used a credit card in 2007. That number plummeted to 72% in 2008 as consumers worked to reduce their overall debt. Average credit card debt per household with credit cards is just under $16,000 – and the average credit card holder has 3.5 credit cards. What’s more, college seniors are graduating with an average of $4100 in credit card debt.
So how can you best manage credit card debt? Consolidate high-interest cards by transferring balances to a lower-rate card. Check for special balance transfer offers that provide a low, introductory rate on the transfer of balances from other credit cards. These can offer considerable savings. Just be sure that the rate you’ll receive after the introductory period is lower than your current credit card rates or your savings will be short-lived. The national average credit card interest rate is just under 15% but many cards carry rates much higher than this.Tags: Cornerstone Financial Credit Union, credit, credit card debt, financial education, interest rate, managing debt, secured credit, unsecured credit