By: kjmena

Whether you’ve been getting out of debt for years or recently accumulated new debt, it’s important to know the basics of owing money and how bad debt may affect the different aspects of your life. This resource gives you a basic knowledge of the different types of financial debt and how creditors, lenders, employers, and other parties may utilize this information. By arming yourself with this knowledge, you can select the best debt options available for your own financial situation.

Also you will be better prepared for when you do find yourself in a difficult situation based on your debt. You always want to be well informed so you can choose the best option for your debt needs. You don’t want to get yourself in more debt by not being prepared ahead of time.

What is Debt?

Debt can be categorized in any number of ways and it’s helpful to understand the differences between each when working on debt elimination. The most important distinction is secured versus unsecured debts. Secured debt means that the money you owe has some sort of tangible property associated with it that the lender may take possession of in the case of default. Examples of secured debt include a mortgage and car loan: your home and car act as collateral in repaying the debt. Unsecured debt, on the other hand, has no property tied to it. This includes credit card debt, student loans, and medical bills.

It’s also crucial to know the type of interest rate attached to your debt: is it fixed or variable? If your rate is fixed, it will remain the same for the life of the loan (unless you refinance or consolidate your debt). An adjustable rate, on the other hand, may fluctuate depending on how a broader index of interest rates performs. This will directly impact the amount of interest collecting throughout your debt repayment.

Are All Debts Bad?

Most financial experts agree that there is a difference between good and bad debt. The general rule of thumb states that a debt contributing to an investment is considered good. This includes things like a mortgage or your student loans, because presumably, your property value will grow and your student loans will contribute to a higher-paying job. Bad debt, on the other hand, refers to money owed on things that will lose value, like a car or personal purchases made on a credit card. When brainstorming debt reduction strategies, first focus on the bad types of debt before tackling good debt like your student loans or house payment. It’s also important to note that buying a house or taking out a hefty student loan is not automatically a good idea – always research the real estate market or job industry you are interested in to analyze the potential pay-off before diving into any major financial decisions.

How Is Debt Used Against You?

Most Americans carry some type of debt, but do you understand how certain debt problems affect your everyday life? The biggest impact you’ll notice when struggling with debt is your credit score. Creditors and debt collectors report delinquencies to the three major credit bureaus. The amount you owe accounts for 30% of your credit score and your payment history accounts for 35%, so if you owe a lot of money and are delinquent on any of your debt payments, your score could quickly fall. Lenders and credit card companies use your credit score to determine your interest rate on future loans and lines of credit. The lower your credit score, the higher interest rate you’ll receive, resulting in higher payments.

Another recent trend concerning credit reports is potential employers using them as a part of the application screening process. While they won’t be able to see your credit score or all of the details a lender would, some employers use applicants’ credit reports to determine their level of trustworthiness and responsibility. This underscores the importance of having clear debt even if you’re not looking for new loans or credit cards anytime soon.

A credit score has a heavy impact on your future financial options as it will determine the type of loan you will get on your house or your car. This will then go on to affect whether you get your dream home or car.

Basically, a credit score is a measure of risk. If you have a high score that means you are a low risk individual and when you have a low score that means you are a high risk individual. Creditors will determine if they want to take a risk on you depending on this score.

How Can You Eliminate Debt?

The road to debt recovery begins with developing a debt reduction plan. If your financial debt is in or close to default, consider calling a debt helpline to learn about the options available to you. A trained debt advisor will help you map out a strategy to achieve debt resolution. They can see if you qualify for any debt forgiveness programs and also help you explore debt consolidation, which refinances several outstanding loans into one payment. Receiving debt assistance from a reputable company is a low-stress way to eliminate debt by creating a repayment plan made just for you.

 

One of these debt relief options is a debt settlement company. They would act as a negotiator for you against your creditors to help aid you in eliminating your debt. They work to reduce the amount you will owe, which will save you money, and customize a debt settlement plan according to your needs. A debt settlement company will make your debt relief options more available and easier to handle as you work toward becoming completely debt free.