Managing Your Debt and Finances

Types of Consumer Debt

Obtaining credit is or has been relatively easy for many of us. We were once a more cash-based society. Today, it’s almost second nature for us to use and live by our credit cards. Recently enacted legislation, however, offers consumers a greater level of protection, making it more difficult for banks and lenders to charge exorbitant fees. Stay in control of your finances and learn how the new rules regarding credit card interest rates and fees can help reduce consumer debt. 

• Closed debt is when you borrow a fix amount of money that you pay back at a fixed amount for a definite time period. Your car loan is a closed debt. You borrow what you need, you know your monthly payment and you know when you have paid it off.
  
• Revolving debt is when the amount you owe can change over time, the amount you pay each month can go up or down, and as long as you still owe, you continue to make payments until it is paid off. This is your typical credit card debt. The more you charge — up to your credit limit — the more you owe, the higher your monthly payments and the longer it will take you to pay it off.
• Secured debt is when the lender has some type of ownership or control that the lender can fall back on if you don’t make your payments. For example, the lender can take back the car and sell it again if you don’t make your payments. Typically, secured debt has a lower interest rate because the lender has another way to get money back on the loan.
• Unsecured debt means the lender has no interest or control over what you buy with the loan. If you don’t make your payments, the lender has to come after you for payment and can’t repossess the shoes, groceries or the restaurant meal you bought with that credit.

RALs Aren’t Pals

Avoid payday loans and rapid anticipation loans (RALs). Payday lenders promote their services as a perfect solution for a one-time emergency. But these short-term loans can have annual percentage rates of 400 percent or higher and can lead to a never-ending cycle of debt. Many payday loan shops operating nationwide are near military bases and in African American neighborhoods. RALs (rhymes with "pals") sound friendly, but these short-term loans aren't the blessings they seem, as many people have discovered after calculating the fees and interest charges.