Types of Consumer Debt

Consumer debt accumulates when you put daily spending on credit.Consumer debt is debt that accumulates by spending on daily expenditures. Common types of consumer debt are credit card, overdraft and personal loan. Interest rates on consumer debt are higher than other forms of debt such as mortgage and education loan.

Consumer credit is easily available and this creates an environment that encourages a consumer to spend more than he or she earns. This contributes to the ever increasing problem of bankruptcy.

As opposed to mortgages and education loans, many people view consumer debt as evil because it eats into a person’s net worth and encourages a person to live beyond his means.

Credit Card

A credit card is a piece of plastic card issued by the bank or card issuer. It allows the cardholder to pay for purchases or services without using the cardholder’s money. The card issuer will pay the merchant or service provider first and then later sends the cardholder a monthly statement detailing all the purchases and services which the cardholder has bought. The cardholder then pays back the money to the card issuer.

The high credit limit several times your monthly income encourages you to spend beyond your means.A credit limit is the maximum credit line that the card issuer extends to the cardholder. This credit limit varies from person to person. It depends on many factors including your income, credit score and the length of time you have been using the card.

Every credit card has an Annual Percentage Rate or more commonly known as APR. Most credit cards have an interest-free period. If you payback the card issuer within the interest-free period, you will not be charged any interest. However, if you don’t clear your outstanding balance within the interest-free period, then interest will be calculated on the remaining outstanding balance on your credit card. Interest is calculated daily until you clear off the balance.

If you withdraw cash from your credit card, there is usually no interest-free period. Interest is charged from the moment you withdraw the cash.

Read more:
• Choosing The Right Credit Card For You.
• Ways to Minimize Credit Card Interest

Overdraft

When you issue a check, ensure you do not spend above the authorized overdraft limit.A current account or checking account may come with an overdraft facility. When an accountholder spend more that what you have in the account, he is overdrawing the account. He is using the bank’s money instead of his own money and the bank charges interest for this.

Be careful not to spend exceeding the authorized overdraft limit. You could be imposed hefty charges and high interest rate if you ever exceed the authorized limit.

Overdraft is an excellent choice for borrowing small amounts of money for a short period. It is easy to arrange and there is no fixed repayment. You can pay back the money as and when you can afford to do so.

If you intend to borrow for long term, then a personal loan is a better option because of the lower interest rate.

Personal Loan

A personal loan is a loan for personal use. The purpose of the loan is not specific, unlike mortgages or automobile loans where the purpose of the loan is spelled out in the loan agreement. It is possible to consolidate your debt using a personal loan.

Personal loans can be secured or unsecured. Secured loans have a lower interest rate.

Personal loan is a good choice for medium to long term borrowing. It is cheaper than overdraft and it has a fixed repayment period.