Types of Debts

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Types of Debts
Types of Debts (Image: Andrea Rueda: Flickr.com, nacu:morguefile.com, alvimann:morguefile.com, jade:morguefile.com)

When reviewing your credit report, you may notice that separate categories exist for different types of debt. This serves to illustrate your financial diversity to lenders who may need to review your credit history. Since different types of debt also factor differently into the credit scoring formula, this also helps ensure that your credit score is as accurate as possible.

Types

Debts that are current and reflect positively on your credit report will be categorized as either revolving, open or installment debt. This is not to say that every revolving or installment account will be positive. Your payment history (or lack thereof) will determine which subcategory, if any, your debt appears in.

Revolving Debt

With revolving debt, you receive a line of credit that you can make purchases against. Revolving accounts set a limit to the amount of credit that you are able to use. Paying off your revolving debt once again frees up your line of credit, so you can then make more purchases. Most revolving debt is composed of credit card debt but can occasionally include home equity lines of credit, depending on the amount loaned.

A credit card account is considered to be revolving debt.
A credit card account is considered to be revolving debt.

Open Debt

Open debts are relatively uncommon for most consumers to see on their credit reports. These debts allow consumers a line of credit just like revolving debts, but with a catch. Each month any amount that has been charged against the line of credit must be paid back in full. Unlike revolving accounts, there are no credit restrictions with open debt. Most open debt will not appear on your credit report unless it goes unpaid and is inserted as a derogatory account. Cell phones and utilities are considered open debts.

Your cell phone plan is an open debt.
Your cell phone plan is an open debt.

Installment Debt

Installment debts are debts in which you finance an amount of money and pay back that amount by a preset date in separate "installments." Paying down the installment debt does not grant you the ability to make more charges against the account. Two examples of installment debt are mortgage loans and student loans.

If you have a mortgage, you have installment debt.
If you have a mortgage, you have installment debt.

Derogatory Debt

Derogatory debts are those that you agreed to but then ceased to make payments on. It does not matter whether the original debt was a revolving, open or installment plan. Once your original creditor has not received a payment for a certain number of days (usually 180), the creditor can "charge off" the debt. This will cause the debt to be categorized as derogatory. Collection accounts are one example of derogatory debt.

Public Records

Public records on your credit report are legal statements of either past or current debt. Some public records accounts will require you to make regular payments just like any other debt, yet some will not. An example of a public record debt is a judgment. Once a judgment is levied against you in court you are expected to make payments until the judgment is satisfied. However, it must be considered a public record because of the legal action taken to procure payment. Other examples of public records are bankruptcies and tax liens. Both reflect money you either owe currently or owed in the past, but neither are considered to be defaulted.

Legal statements of debt are public record.
Legal statements of debt are public record.

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