What Does Unsecured Credit Card Debt Mean?

Credit card debt is usually unsecured, meaning that no asset backs the loan. If the borrower defaults on a loan taken out by using a credit card, the lender is not automatically entitled to an asset or part of an asset owned by the borrower.

Secured vs. Unsecured Debt

Secured debt is backed by an asset, such as a house backing a mortgage or an automobile backing a car loan. If the borrower cannot or will not make payments, the lender has the legal right to seek compensation through sale or repossession of the asset. A lender of unsecured debt has no such rights; for instance, a credit card company cannot foreclose on a house.

Unsecured Debt: More Risk

Because unsecured debt carries more risk for the lender, it is usually more expensive--that is, charges a higher interest rate. This is one reason borrowing on a credit card is almost always more expensive than a taking out a secured loan.

Lenders Can Seek Damages

Though credit card debt is usually unsecured, that doesn't mean that lenders have no options when it comes to getting their money back. Lenders can hire collection agencies to pester delinquent borrowers; seek a judgment against them in court; and report their delinquency to credit bureaus. If the borrower goes bankrupt, an unsecured lender can seek payment just like any creditor, though it is in a worse position to recover its money than a secured lender.

References

• BankruptcyHome.com: Secured and Unscured Debt