How Credit Cards Work
There are essentially two kinds of consumer credit available to you: secured
and unsecured.
Secured credit is attached to some sort of collateral. For instance, when
you take out a loan to buy a house, the house itself is collateral. The same
goes for buying a car, a boat, a motor home, a trailer or a personal watercraft.
In the event that you stop paying back the money you owe, the secured lender
can repossess your car or foreclose on your house. In other words, the company
can take possession of the collateral; and that gives the lender some confidence
in extending you credit.
Unsecured credit is different. In this case, there is no collateral. The
lender has to take a much greater risk in assuming that you will pay back
the money you owe.
Examples of unsecured credit include:
- credit cards;
- department and specialty store charge accounts;
- student loans; and
- signature loans.
Unsecured debt can also include such things as medical bills, legal bills,
cellular telephone bills, bounced checks and health club memberships.
Unsecured lending can be risky business. According to the Federal Trade
Commission (FTC), nearly 1.5 million consumers filed bankruptcy in 2001—primarily
to get out of repaying unsecured debt.
Next: A History of Credit |
