What is Unsecured Credit Card Debt?

An unsecured credit card isn’t backed by any sort of collateral. When a person has unsecured credit card debt, this means he owes money because of purchases, fees, or finance charges made or accrued through the use of an unsecured credit card. Often, people think having credit card debt means an individual is behind on his payments. In reality, however, even a person who has been making timely payments can have debt, as this is simply money that is owed. Having too much unsecured credit card debt or being in default on agreed-upon payments can, however, damage a person's credit score and financial health.

There are two basic types of credit cards a person may hold: an unsecured card and a secured card. An unsecured credit card is not backed by collateral of any type. This essentially means the credit card company that issued the credit card doesn’t have anything it can seize in the event that the credit card holder goes into default on his payments. This differs from a secured debt, such as a car loan or mortgage. If a borrower defaults on a secured loan, it can recoup at least some of its money by repossessing and selling the car or foreclosing on the home and selling it.

A secured credit card is typically secured by at least some of the credit card holder’s own money. For example, if a credit card holder wants available credit of $500 US dollars (USD) on a secured credit card, he may have to deposit $500 USD of his own money with the credit card company. The money he deposits secures the debt so the credit card company’s risk in extending credit to him is lessened. In some cases, a credit card company will extend credit that exceeds the cardholder’s security deposit, however.

It can be easy to accumulate unsecured credit card debt. Often, people use their credit cards to purchase items or services they cannot afford, thinking it will be easy to pay the bill later. What often occurs, however, is the gradual accumulation of large credit card bills that the cardholder cannot pay off in a reasonable amount of time. This can translate into the necessity to make payments, often over a period of years, and paying finance charges as well. In some cases, cardholders can only afford to make the minimum payments required by their credit card companies, which often dramatically extends the amount of time it will take to get out of unsecured credit card debt.

Many financial experts advise consumers against carrying large amounts of unsecured credit card debt. In fact, some recommend that cardholders only charge the amount they can afford to pay back within a credit card billing cycle. Thinking of credit card use as taking on a loan, rather than as an easy way to purchase, may help individuals keep unsecured credit card debt in prospective and decide how best to protect their financial health.