Understanding Debt: Credit Cards

We are starting a new series on a topic most people are familiar with but may not like to talk about- debt! Not all debt is bad and when used correctly, it can actually benefit you. However, most people aren’t benefiting; their future goals are hindered by it. By gaining a better understanding on the different types of debt and how they work, you can make better decisions on loans and credit cards.

There are two main types of debt. Secured debt is backed by an asset that the lender can take if you don’t pay, and unsecured that isn’t backed by any collateral. This is an important distinction because the interest rate for unsecured debt is much higher (average 10-29%). This is because the lender is at more risk to lose money if you don’t pay back an unsecured loan. Credit cards are the most common type of unsecured debt and are usually issued as a line of credit. The limit (amount you can borrow) renews monthly as your purchases are paid off and you can use as much or as little credit as you need each month. It’s best to pay off your balance on time and in full every month. If you only make the minimum payments and carry a balance on your card over time, interest charges are added to the next bill, increasing the amount you owe every month. On top of the high interest rates you may pay, if you miss making a minimum payment, it has a serious impact on your credit score and you’ll be hit with other fees and penalties.

Using credit cards responsibly can help you build a good credit history and obtain better interest rates only available to people with good credit scores. Want to know more? Read our full article here. Need help with understanding your debt? Chat with a financial coach, they’re here to help.