{"id":24549,"date":"2026-04-27T06:27:35","date_gmt":"2026-04-27T06:27:35","guid":{"rendered":"https:\/\/incredipros.com\/?p=24549"},"modified":"2026-04-27T06:27:35","modified_gmt":"2026-04-27T06:27:35","slug":"what-is-debt-ramsey","status":"publish","type":"post","link":"https:\/\/incredipros.com\/?p=24549","title":{"rendered":"What Is Debt? – Ramsey"},"content":{"rendered":"
\n

Debt is a big topic\u2014and Americans have a big problem with it. In fact, total personal debt in the U.S. is now at over $18 trillion!1<\/sup> Yowza!\n <\/p>\n

\n

Pay off debt fast and save more money with Financial Peace University<\/em>.<\/p>\n<\/p><\/div>\n

But what is debt? You\u2019ve probably heard a lot of different answers and examples and advice . . . Heck, with so many opinions, it all gets confusing\u2014and honestly, a little annoying.\n <\/p>\n

So let\u2019s get some straightforward clarity. How? By breaking down what debt\u00a0actually is<\/em>\u00a0and how it works (in words a real human can understand).\n <\/p>\n

From annoyed confusion to actual clarity? Let\u2019s do this.\n <\/p>\n

What Is Debt?<\/h2>\n

In simple terms, debt is owing any money to anybody for any reason. But what about in legal terms?\n <\/p>\n

What\u2019s the legal definition of debt?<\/h3>\n

\u201cDebt is a financial liability or obligation owed by one person, the debtor, to another, the creditor.\u201d2\u00a0 <\/sup>In other words, debt is when someone borrows money (a debtor) and is responsible for paying back the person or company who loaned them that money (the creditor or lender).\u00a0\n <\/p>\n

What\u2019s the difference between debt and a loan?<\/h3>\n

Basically, a loan is a kind of debt<\/em>. All loans are debt, but not all debt comes in the form of a loan. It\u2019s like how a tortoise is a kind of a turtle<\/em>. All tortoises are turtles, but not all turtles are tortoises. And if you didn\u2019t know that\u2014you learned two new things!\n <\/p>\n

Understanding the Types of Debt<\/h2>\n

When we talk about types<\/em> of debt<\/em>, we\u2019re talking about how the debt works<\/em>. Does the lender make you put up collateral (something they can take if you don\u2019t pay)? Is the debt a one-time loan or an open line you can keep borrowing from?\n <\/p>\n

What does that all mean? Let\u2019s break down the types of debt and see.\n <\/p>\n

By the way, we\u2019re about to use lots of debt vocab, but we\u2019ve got a handy glossary of debt terms defined if you ever need to pop down and look at it!\n <\/p>\n

Secured Debt<\/h3>\n

With secured debt, you\u2019re borrowing money that\u2019s backed by a physical item. In other words, there\u2019s\u00a0collateral<\/em>.\u00a0It\u2019s a lower risk for lenders because they either get your money in payments or they take back what you \u201cbought\u201d and sell it. So, if you have a car loan and stop making your payments, the lender will take back your car and sell it to get their money back.\n <\/p>\n

Unsecured Debt<\/h3>\n

With unsecured debt, there is no collateral. Credit card debt, for example, is unsecured debt. This type of debt is riskier for lenders since there isn\u2019t anything they can take if you don\u2019t pay\u2014so unsecured debt often has higher interest rates to cover the lenders\u2019 backs.\n <\/p>\n

Revolving Debt<\/h3>\n

Revolving debt is an open line of credit (like a credit card or store credit card). You might have a set borrowing limit (called a credit limit), but if you make the minimum payment on time, you can keep borrowing and spending. But if that\u2019s all<\/em> you pay each month, you\u2019ll have to worry about interest.\n <\/p>\n

Nonrevolving Debt<\/h3>\n

A nonrevolving debt is when you take out one lump sum (like a mortgage) and agree to an interest rate and repayment plan.\n <\/p>\n

Sneaky Debt<\/h3>\n

It would be just plain wrong of us not to mention sneaky debt. These are things you could pay cash for but you\u2019re encouraged to finance instead\u2014like buy now, pay later installment plans or anything a salesperson says you can take home today<\/em> and pay off some other time<\/em>. They might use words like \u201cblah blah days same as cash\u201d or \u201czero percent APR.\u201d\n <\/p>\n

It\u2019s sneaky because it feels like a normal way to pay. In the moment. But remember, debt is owning any money to anybody for any reason. If you take something home now<\/em> that you\u2019ve promised to pay for over time, that\u2019s debt.\n <\/p>\n

Quick callout:<\/strong> Some debts can fit into more than just one type. For example, you can have a secured, nonrevolving debt like a mortgage. (We\u2019ll explain that more under the mortgages section.)\u00a0\u00a0\n <\/p>\n

What Are the Common Forms of Debt?<\/h2>\n

Okay, we\u2019ve talked about the different types <\/em>of debt. <\/em>But we can\u2019t fully answer \u201cwhat is debt\u201d without talking about the different forms <\/em>or kinds <\/em>too. Debt comes in all shapes, sizes and amounts. But here are some of the most common kinds.\n <\/p>\n

Credit Card Debt<\/h3>\n

Basic Definition:<\/strong> A credit card is piece of plastic (or metal, if it\u2019s fancy) that allows the cardholder to borrow money to pay for stuff. Credit card debt happens when the cardholder doesn\u2019t pay off the total amount they charged to the card at the end of the month. At that point, the cardholder owes the remaining balance, plus interest.\n <\/p>\n

Usage:<\/strong> Credit cards are pretty common. According to our own research, eight in 10 Americans have a credit card. Credit card debt<\/em>? Also common. Altogether, 45% of Americans share a total of $804 billion in credit card debt.3,4<\/sup>\n <\/p>\n

Debt Type:<\/strong> Credit cards fall under the revolving and unsecured debt types because a person can keep borrowing (as long as they\u2019re paying the minimum payment and not maxing out their credit limit), and the lender doesn\u2019t have an actual item they can take back from the cardholder if they stop making payments. That\u2019s one reason a lender looks at a person\u2019s income and credit score before setting a specific credit limit. Anyone who seems risky will be allowed to borrow less or pay higher interest rates.\n <\/p>\n

Interest:<\/strong> One key part of credit cards is the interest, or the fee credit card companies charge to use their services. The average APR (annual percentage rate) on credit cards is 17.13% (as of winter 2021).5<\/sup>\u00a0\n <\/p>\n

Let\u2019s do some math on that. If you multiply 17.13% by the $787 billion Americans owe, that\u2019s about $134.81 billion credit card companies will make on interest alone. So, this kind of debt isn\u2019t just common, it\u2019s super profitable\u2014for the credit card companies.\n <\/p>\n

Student Loans<\/h3>\n

Basic Definition<\/strong>: A student loan is money borrowed to cover higher education costs.\n <\/p>\n

Usage:<\/strong> Student loans are the fastest growing debt in America. As of winter 2021, the federal student loan debt total in America is 1.58 trillion.6<\/sup> Yes, trillion. The majority of students (69%) leave school with at least some<\/em> student loan debt.7<\/sup>\n <\/p>\n

Debt Type: <\/strong>Student loans can be private or federal, and both are unsecured, nonrevolving debt. Of course, there are penalties for defaulting (or not paying) on your student loans, but no one comes and repossesses your degree. And it\u2019s nonrevolving because, even though someone can take out multiple student loans, each one is a one-time loan for a specific purpose.\n <\/p>\n

Interest: <\/strong>Interest rates vary a ton depending on what kind of student loan you\u2019re talking about, but the average student loan interest rate is 5.8%.8<\/sup>\u00a0\n <\/p>\n

That might not seem like a lot, until you realize the average borrower has $38,792 in student loans and takes 20 years to pay that off.9,10<\/sup>\n <\/p>\n

A quick run of those numbers through our Student Loan Calculator shows that \u201cnot a lot\u201d 5.8% turns into $26,936.89 paid in interest alone<\/em> over those 20 years. I think we can all agree: That is<\/em> a lot.\n <\/p>\n

Auto Loans<\/h3>\n

Basic Definition: <\/strong>A car loan is money someone borrows to purchase a car.\n <\/p>\n

Usage:<\/strong> American auto loan debt is at $1.44 trillion with an average of $31,758 per household (winter 2021).11, <\/sup>12,13,14<\/sup> <\/sup>\n <\/p>\n

Debt Type:<\/strong> Auto loans are nonrevolving, secured debt because it\u2019s one lump loan, and the car acts as collateral. If you don\u2019t make payments on the car, goodbye, car. The lender can take it back, sell it cheap at auction, and sue you for the difference. Yes, really.\n <\/p>\n

Interest:<\/strong> The average interest rate for a new car is 4.09% and 8.66% for a used car.15<\/sup>\n <\/p>\n

We ran those numbers through our Auto Loan Calculator. If you bought a $31,142 used car at that 8.66% interest rate with a 60-month auto loan, you\u2019d end up paying $7,338 just in interest. Yuck.\n <\/p>\n

Personal Loans<\/h3>\n

Basic Definition<\/strong>: Personal loans are a lump sum borrowed from a bank, credit union, or online lender.\n <\/p>\n

Usage:<\/strong> This kind of debt is often used to cover a specific expense or in a (risky) attempt at debt consolidation. In other words, sometimes people take out a personal loan to pay off other loans. Hmm.\n <\/p>\n

Twenty-two percent (22%) of American adults have a personal loan and owe an average of $16,458.16<\/sup>\n <\/p>\n

Debt Type: <\/strong>Personal loans are nonrevolving debt, but they can be secured or unsecured. It all depends on the loan terms, which are whatever the lender wants them to be.\n <\/p>\n

Interest: <\/strong>Interest rates on personal loans can vary based on how reliable the lender thinks the borrower will be. If a person is considered a higher risk of not paying back their debt, they\u2019ll get slapped with a higher interest rate.\n <\/p>\n

Mortgages<\/h3>\n

Basic Definition: <\/strong>A mortgage is a loan taken out from a lender to help you buy a house.\n <\/p>\n

Usage:<\/strong> Forty-two percent of households have mortgages, with a median monthly payment of $1,595 and an average mortgage debt per household of $202,454 (summer 2021).17,18,19,20<\/sup>\u00a0\n <\/p>\n

Debt Type:<\/strong> Mortgages are secured because the lender can force the sale of the home through a foreclosure if the homeowner defaults or stops making payments. They are also nonrevolving debt because a mortgage is one lump sum borrowed to purchase a home.\n <\/p>\n

Interest:<\/strong> In 2021, the average interest rate for a 15-year, fixed-rate mortgage (which is totally the best way to go) was historically low\u2014at 2.15\u20132.39%.21<\/sup>\u00a0\n <\/p>\n

HELOCs<\/h3>\n

Basic Definition:<\/strong> A\u00a0HELOC\u00a0(aka home equity line of credit) is when you borrow on the equity of your home. The equity is the difference between what the house is worth and what you still owe on your mortgage. So, with a HELOC, you\u2019re giving up the equity you\u2019ve earned and trading it in for more debt. Again, yuck.\n <\/p>\n

Usage:<\/strong> There are more than 4.7 million HELOCs (totaling $349 billion) in America, and the average American household with this type of debt owes $73,685.22,23<\/sup>\n <\/p>\n

Debt Type: <\/strong>Since your home can be taken away if you don\u2019t pay on your HELOC, it\u2019s a secured debt. Since it\u2019s a line of credit, a HELOC is revolving debt.\n <\/p>\n

Interest: <\/strong>Fixed interest rates with a HELOC are super rare, so expect them to go up at the lender\u2019s whim.\n <\/p>\n

Debt Terms Defined<\/h2>\n

Okay, we\u2019ve been using a lot of debt lingo. Here are some clear definitions on common debt terms.\n <\/p>\n

APR: <\/strong>APR <\/strong>stands for annual percentage rate. Some people think it\u2019s the same thing as an interest rate, but APR is the interest rate plus fees<\/em>. Drop that bit of knowledge at your next party and wow your friends. (Results may vary depending on your friends.)\n <\/p>\n

Bankruptcy: <\/strong>Bankruptcy is the legal process of telling a judge you can\u2019t pay off your debt. If the court agrees after a thorough review, they\u2019ll erase some of your debt.\n <\/p>\n

Balance:<\/strong> How much you owe on a debt is the balance. For example, if you pay off the balance of a credit card, you no longer owe on it. If you \u201ccarry a balance,\u201d that means you aren\u2019t paying off the full amount, and you have credit card debt that will be charged interest. (P. S. If you never use a credit card, you\u2019ll never owe on it. Just saying.)\n <\/p>\n

Borrower:<\/strong> A <\/strong>borrower is the person taking on the debt from a lender or creditor.\n <\/p>\n

Business debt: <\/strong>This is money you\u2019ve borrowed to run your business.\u00a0\n <\/p>\n

Collateral: <\/strong>Collateral is property (like a car, home, etc.) a lender can take if you stop making payments on your debt.\n <\/p>\n

Collections<\/strong>: If a borrower stops paying, the debt can go to collections. To be fair, the lender has a right to get their money back. But they (or any collections companies the lender might hire) should follow the guidelines and laws set up to keep them from straight-up harassing a borrower.\n <\/p>\n

Credit limit: <\/strong>The max amount you can borrow or charge is a credit limit. It\u2019s often set based on income, credit score and other factors.\n <\/p>\n

Credit report: <\/strong>Credit reports <\/strong>are super detailed statements about your past and present credit activity. It\u2019s important to check in on your credit report for any mistakes\u2014and even fraud\u2014at least once a year.\n <\/p>\n

Credit score:<\/strong> Your credit score is a number based on your credit history that most lenders use to decide if you seem reliable enough to pay back your debts. But it doesn\u2019t consider your actual wealth\u2014just how \u201cwell\u201d you juggle and how much you use debt. That\u2019s why we call it an \u201cI love debt\u201d score.\n <\/p>\n

Creditworthiness: <\/strong>This refers to how reliable a lender thinks you\u2019ll be in paying off your debt (usually based on how reliably you\u2019ve done it in the past).\n <\/p>\n

Debt: <\/strong>Debt <\/strong>is owing any money to anybody for any reason.\n <\/p>\n

Debt consolidation:<\/strong> This is the process of combining several debts into one monthly bill on a streamlined payoff plan, but it typically keeps the borrower in debt even longer and usually comes with fees and higher interest rates.\n <\/p>\n

Debt snowball: <\/strong>The debt snowball is the best way to become debt-free by paying off debt smallest to largest. (We\u2019ll break it down more in a bit.)\n <\/p>\n

Delinquent: <\/strong>The moment you miss a payment, a loan becomes delinquent.\n <\/p>\n

Default:<\/strong> If you go too long without making payments, your loan will move from delinquency to\u00a0default.\n <\/p>\n

FICO:<\/strong> The most common credit score system is FICO. (It\u2019s another turtle and tortoise situation. FICO is one kind of credit score, but not all credit scores are FICO.)\n <\/p>\n

Your FICO score is calculated like this: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%).24<\/sup> <\/sup>Yeah, it\u2019s all about your relationship to debt\u2014not your responsibility with money.\n <\/p>\n

Interest rate: <\/strong>An interest rate is a percentage the lender charges you for borrowing money. \u00a0\n <\/p>\n

Lenders: <\/strong>The ones loaning the money are called lenders (or creditors). Private companies, banks, credit unions, friends, family and even the government can act as lenders.\u00a0\n <\/p>\n

Loan term: <\/strong>A loan term is the amount of time you have to pay back the loan.\n <\/p>\n

Minimum payment:<\/strong> The smallest amount you\u2019re allowed to pay on your revolving debt is called the minimum payment. Usually, if you\u2019re covering just this, you\u2019re getting charged interest for the remaining balance.\n <\/p>\n

Payday loans: <\/strong>Payday loans are a way for you to borrow money before your next paycheck. Payday lenders take their cut once you\u2019re paid (plus lots of interest). Since you just lost so much of your income, you\u2019ll probably have to take out another payday loan to make it to your next paycheck. See what a horrible cycle they suck you into?\n <\/p>\n

Payment: <\/strong>The amount of money you hand over per month to pay back your loan is the payment.\n <\/p>\n

Principal: <\/strong>The <\/strong>principal of a loan is the total amount that was borrowed. This doesn\u2019t include interest.\n <\/p>\n

Student loan consolidation:\u00a0<\/strong>Student loan consolidation\u00a0is the process of rolling multiple federal student loans into a single loan with one monthly payment. It also lets you trade any variable interest rates for a fixed rate. Student loan consolidation is the only kind of debt consolidation we\u2019re okay with. But because consolidation usually extends the length of your loan, you need to pay more than the minimum payment to keep from forking over a ton of extra money to interest alone.\n <\/p>\n

Validation letter:<\/strong> A very detailed note the debt collector sends to prove that you owe them money is a validation letter.\n <\/p>\n

Zombie debt: <\/strong>Old debt that\u2019s come back to haunt you is called zombie debt. (Perfect name, right?) If a collector tries to bring up zombie debt, watch your back. They aren\u2019t after your brains, just your wallet. It might be something you still have to pay off\u2014or it could be identity theft or a scam. \u00a0\n <\/p>\n

Disadvantages of Debt<\/h2>\n

Here\u2019s the truth about debt: It robs you of your greatest\u00a0wealth-building\u00a0tool\u2014your income.\n <\/p>\n

Debt is all about paying off the past\u2014using this month\u2019s income to cover something you bought last month, last year, or even longer ago. You can\u2019t move forward like that. Debt can\u2019t be \u201cmanaged.\u201d And it doesn\u2019t even go away when you die! You\u2019ll be saddling your loved ones with an unnecessary burden when they\u2019re already devastated.\n <\/p>\n

Unlike Congress, you have a very real debt ceiling\u2014you can\u2019t print your own money, and it will eventually catch up with you. Debt holds your income hostage. It holds your future hostage.\n <\/p>\n

But you can take back your income. All of it. How?\n <\/p>\n

How to Get Rid of Debt. For Good.<\/h2>\n

The absolute best way to\u00a0get rid of all your debt\u2014so\u00a0you<\/em>\u00a0can be the one in control of your own money\u2014is the\u00a0debt snowball method. Here\u2019s how you use it:\n <\/p>\n

List your debts in order from the smallest balance to largest.\n <\/p>\n

Go after the smallest debt first. Put any extra money you can toward that debt. (Pro tip:\u00a0Lower your spending,\u00a0up your income, or both to make this happen!) While you\u2019re attacking the smallest debt, keep paying the minimum on the rest.\n <\/p>\n

Once you\u2019ve paid off the smallest debt, start on the second smallest. Take everything you were throwing at your smallest debt and add it to the minimum payment of the second.\n <\/p>\n

Once you\u2019ve paid off that one, move to the next one, then the next . . . Keep going until you\u2019ve\u00a0paid off\u00a0everything<\/em>.<\/em>\n <\/p>\n

This is why it works: Imagine a snowball rolling downhill. (No really, imagine it.) It gains size and speed as it goes. The debt snowball has you doing the same thing with your debts\u2014knocking out each and every one and gaining momentum and\u00a0motivation\u00a0as you go.\n <\/p>\n

When you start with the smallest debt, you get a quick win early on. That gets you super pumped to keep rocking and rolling until you\u2019re completely debt-free.\n <\/p>\n

EveryDollar Can Help Get You There<\/h2>\n

Now that you know how to get out of debt, how would you like a tool that can make it easier to budget, get that snowball rolling, and help you kick debt to the curb for good?\n <\/p>\n

That\u2019s EveryDollar\u2014the zero-based budgeting app built on commonsense wealth-building principles, including the debt snowball. You can track your debt-free journey directly in the app and create a budget that fits your needs and goals.\n <\/p>\n

Sound good? Sign up for EveryDollar today!\n <\/p>\n<\/p><\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Debt is a big topic\u2014and Americans have a big problem with it. In fact, total personal debt in the U.S. is now at over $18 trillion!1 Yowza! Pay off debt fast and save more money with Financial Peace University. But what is debt? You\u2019ve probably heard a lot of different answers and examples and advice<\/p>\n","protected":false},"author":1,"featured_media":24550,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[55],"tags":[],"class_list":{"0":"post-24549","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-news"},"yoast_head":"\nWhat Is Debt? - Ramsey | IncrediPros<\/title>\n<meta name=\"description\" content=\"Debt is a big topic\u2014and Americans have a big problem with it. In fact, total personal debt in the U.S. is now at over $18 trillion!1 Yowza! 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In fact, total personal debt in the U.S. is now at over $18 trillion!1 Yowza! 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