A secured debt is something that is backed by collateral, so the classic example is a mortgage or house. If you have a mortgage and you stop paying, then the bank can foreclose on your house. They can sell the house and use that money to pay back the loan that you took out, so the loan is secured by the house. Cars are another good example of secured debt, and sometimes you have things like furniture or appliances that can be secured by the items that you’re buying.
An unsecured debt is something like a credit card where they’re just giving you a line of credit and there is nothing backing it. They don’t have anything to fall back on, they are just trusting your credit or your word, so to speak.
Examples of unsecured credit would be things like payday loans, pay check advances, or medical bills. It’s not necessarily credit but they are debts that you have. Anything that’s not backed by a collateral. As far as which is best for your credit, specifically for your credit rating, secured debt helps out your credit score a little bit better than unsecured debt, although what you want to have for the best credit score is you want to have a diversity of credit, so you want to have some of both kinds.
The only thing that helps your credit out is having a low debt to credit ratio. If you have credit cards that are near the limit, that’s going to hurt your score versus credit cards that have a lot left in terms of your credit amount versus your balance. So, you want a diversity on your credit report to help you out.
What Are Some Types of Debt that You Should Absolutely Avoid At All Costs?
Payday loans are a really bad idea because they are so harsh, so expensive in terms of their interest rate. The companies that give them out see people that are having trouble paying their bills. A lot of times, it’s people that are going to end up filing bankruptcy, they’ll see the payday loan people right before they decide to talk to an attorney about bankruptcy. In my opinion, they should have just kept the payday loan people and come and talk to the bankruptcy attorney, but that’s the topic for another discussion.
It’s not that it’s going to hurt your credit score to go and get a payday loan. If you were to go and get one and pay it off, then that’s fine. There is nothing bad about it. It’s just incredibly expensive with the interest rates that they charge, and those companies are merciless and ruthless.
If you’re even a little bit late or off on the terms that you agree to, they’re going to do everything they can legally do to get money from you or to get their money back. If you are in a position where you need one, then you should already be hearing alarm bells and thinking you need to go and have a consultation with the bankruptcy attorney and talk to him about your situation and see if there is something we all do differently in doing the payday loan or a title loan or something like that.
Should I Use A Credit Card Received After a Bankruptcy or Just Keep the Balance at Zero?
You don’t want to have it at zero. If you have a credit card that you are not using, that’s not really going to help your score out. If you have a credit card and you’re paying it off but your balance is above 50 percent, then that’s going to help your credit a little bit, but it’s not going to help it as much as if you had the balance lower. 50 percent means using half of the credit.
Let’s say you get a credit card that has a limit of $6,000, so if you’re using over 3,000, you want to get that down if you can, and the best place to be, the real sweet-spot, is at less than 10 percent. If you get a credit card with the limit of $6,000 and you can keep that limit under $600 by using it and paying it off each month, then that’s great.
The best way to do it is to get your credit card, use it for normal things that you would be using your debit card or a checking account for, but then to just pay those items off at the end of the month, so pay down your balance each month and then use it up, wait till your statement comes, pay down the balance and then so on and so forth so that you’re keeping it under 10 percent of your credit limit but you’re also using it so that’s helping your credit out.
For more information on Secured & Unsecured Debt, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (801) 441-2013 today.