Credit
Credit is debt. It is not income. Credit is a way to purchase. It is not a payment. The check you write to pay your credit card bill is your payment.

Two types of credit are secured and unsecured.

Secured credit is a loan backed by an asset. For example your mortgage loan is backed by your home. If you do not pay, the bank forecloses.

Unsecured credit is primarily credit cards. This is the most costly form of consumer debt. Why? The financial institution does not have collateral to take if you do not pay. Also, credit cards are the easiest form of credit to receive. Your finances are not scrutinized, as with a mortgage. So, credit cards are a more risky form of debt, and the greater the risk the higher the interest rate.

People who borrow the equity from their homes to pay off credit card debt are exchanging unsecured debt for secured. The benefit is a lower interest rate in some cases. However, there are ramifications to this. If you are unable to make payments your house is at jeopardy. Also, depending on the secured loan terms, you may end up paying much more than the original credit card balance. Why? The terms of agreement may be for 15 years. Interest over this time adds up. But, if you live on a budget and stop charging, you may have the credit card balance paid in five years without the home equity loan.

To make a savvy decision to repay debt: consider not only the interest rate, but also the timeframe of payments and the consequences of secured versus unsecured credit. If you choose a secured loan always compare the interest rate to the APR (Annual Percentage Rate). The APR includes lending fees. It helps compare one loan to another.

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