Except for specifically designated secured credit cards, the standard credit cards you carry in your wallet or purse do not constitute a secured debt. That’s the primary reason behind the fact that credit card interest rates are so high.
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According to BusinessDictionary.com, a secured debt is one in which the borrower pledges certain assets as collateral for the debt. Those assets must be of greater or equal value in order to satisfy the requirements of a secured debt. Because credit card users don’t put up any personal assets as collateral that makes credit cards unsecured debts.
If credit cards are unsecured, how do issuers collect on bad debts?
Bad credit card debt is one of the big factors causing real damage to the U.S. economy. When the credit card users don’t pay their bills, the companies that issue the cards must attempt to either collect on their own or refer the accounts to a professional collection agency.
If the company trying to collect the credit card debt is unsuccessful, a last resort is to take the consumer to small claims court through a civil lawsuit. But if the consumer can’t pay the credit card bill, he likely doesn’t have the means to settle a judgment the court may enter against them.
The nature of unsecured debt means credit card companies take huge financial losses every year because of unpaid bills.
For those of us who make good on our credit cards, the amount of unpaid credit card debt still translates into higher interest rates, higher service fees, and ultimately higher prices at the checkout counter. We are helping the credit card companies recoup some of their lost debt through higher interest rates and fees. When someone does not pay his or her credit card bill the rest of us suffer for it.
Is credit card debt wiped out in bankruptcy?
Because credit card debt is unsecured it is, more often than not, wiped out in a Chapter 7 bankruptcy proceeding. According to online legal information portal NOLO, individuals who choose Chapter 13 bankruptcy may have to pay some of their unsecured credit card debt. Whatever remains unpaid after the court approved payment plan has been completed is then discharged by the court.
Chapter 7 and Chapter 13 are the designations under which individual consumers file bankruptcy. Businesses will use Chapter 11 in most cases, which treat their unsecured debt slightly differently. Since Chapter 11 is a reorganization that a liquidation, most businesses who have overextended credit cards will still end up paying their balances in full. A bankruptcy court can modify those debts as needed.
What are secured credit cards?
A credit card that is specifically designated as being secured is a different type of credit card altogether. It is secured in the sense that the consumer deposits a certain amount of cash with the credit card company to be used as collateral. That cash remains untouched, usually in an interest-bearing account, as long as the consumer continues to pay monthly credit card bills on time. The only time that cash is accessed is when the consumer doesn’t pay his bill.
In the case of a secured credit card your cash deposit acts as the collateral which secures the loan.
Secured credit cards are a good way to establish new credit or repair damaged credit. It’s not impossible for someone with no credit at all to use a secured credit card for 12 to 18 months and then wind up with a very high credit score at the end of that period. As long as the individual uses the card on a regular basis and pays all of his bills on time, he is building a good credit history.
Are prepaid credit cards secure or unsecure debts?
Credit cards that you prepay in advance are actually not credit cards at all. They are simply debit cards that look like a standard MasterCard, Visa, or Discover card. When you purchase one, you are essentially depositing money with the card issuer for the privilege of using the card. Every time you use it, the merchant sends an electronic bill to the card issuer who then sends the cash back to the merchant.
Because standard credit cards are unsecured debt is important consumers use them responsibly. If you already find yourself in a bad position, you might consider seeking consumer credit counseling to help you get your financial house back in order.
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