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Secured Debt Or Unsecured Debt – Which Is Best?

Secured vs. unsecured debt - which do you have?

If you are starting to build your credit history by applying for your first credit card or if you’re working towards rebuilding your credit score after some hard times there are several options available to borrowers to help you create or reinstate an excellent credit profile.

People often think credit is hard to obtain, but the truth is there are several things you can do to help the application get approved. One of them is deciding between secured debt or unsecured debt.

What is Secured Debt?

Secured debt means you need to put up an asset as collateral. Car loans and mortgages are a common form of secured debt. It just means that the asset for which the loan is granted becomes the collateral. These types of debts are usually substantial loan amounts and the bank takes security in case of default. If you find yourself on hard times and are unable to repay your mortgage the bank can seize and sell your home in order to recover their losses. The same is true for car loans.

In the realm of credit cards, it looks a bit different. If you’re applying for your first credit card as a teenager, if you’re new to the United States and starting to build your credit history or if you’re trying to rebuild your credit score after some financial troubles you may be asked to give security in exchange for your credit cardUsually, the ratio is 1:1 meaning if your credit card limit is 1,000 dollars, you need to give the bank (or credit card company) 1000 dollars in assets such as cash savings or an investment. However don’t be surprised if the bank asks for two or three times the credit limit in the form of security, this all depends on the individual situation. This money is frozen and held as collateral in case you default on payments. After a certain period of time (usually one year) the bank can release the collateral on the credit card and it becomes an unsecured debt.

How is Unsecured Debt Different?

This type of debt is just the opposite of secured. It means the bank (or other creditor) lends money without any asset set aside as collateral. If you miss payments on unsecured debt the missteps are automatically reported to the credit bureaus (Equifax and Transunion) and can definitely harm your credit score as well as your financial wellbeing. Common forms of unsecured debt are lines of credit, personal loans and credit cards.

Which One is Best for You?

To be honest, this truly depends on your personal financial situation as well as the approval criteria of the credit card company or bank. Sometimes you don’t have a choice in the matter. Your bank can make having security a condition of approval, this is very often true for credit that is granted for tangible assets such as automobiles and homes.

The team at CESI is committed to helping you make wise financial decisions and to helping you understand how to get out, and stay out of debt. For a free debt analysis, contact us and find out how we can help.

Image Source: Pixabay

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