Credit and Debt

Credit and debt are synonymous. Understanding credit is a foundation to build the core concepts of the debt collection career. Examining credit as debt, will also further an understanding of debt collection in general. It will impart an awareness of the different types of debt collectors and the cause for specialization in the field of debt collection. This will further awareness of the types of collection jobs that are available, and which opportunity would be a best fit. Understanding the basics of debt will impart the ability to present knowledge well in the interview process.

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Credit is a complex financial instrument, governed by law and protected with contract. As such, there are many types of credit granted unique to respective situations requiring its use. Credit defined is the practice of providing money, services, or goods to an individual, or entity, on the promise that repayment will occur at a future date. A contract exists between the two parties, the lender and borrower. The contract is a promissory note, essentially a promise to pay in the future per the terms and conditions set forth in the contract for the goods, services, or money received. This contract is a legal agreement that both parties enter into. The contract allows a debt collector the right to contact the borrower if the terms of the contract are broken. Once credit is accepted, it becomes a debt owed and eventually due. This is where debt collection comes into play.

The types of collection jobs available are dependent on two types of debt. The two types are commercial debt and consumer debt. Commercial debt pertains to a debt that exists between two businesses or companies, for the express purpose of enabling, or furthering, the ability of the borrower, either an individual or entity, to conduct business. For example, an airplane manufacturer extends credit to an airline company to by their airplanes. Consumer credit appertains to credit issued to individuals for the purpose of purchasing goods or services. For example, a department store issues credit to a shopper to buy their merchandise. Commercial and consumer debt differ in the purpose of the credit, the laws that govern the contract, the goods and services purchased with the credit, and often the amount of the debt owed. The methods to collect these types of debt are different. In most cases, commercial debt remains in house and not outsourced to a third party. On the other hand, outsourcing to a third party for collection is a common practice for consumer debt, largely in part its enormous volume.

These two types of credit will have an important status of being either secured or unsecured debt. The difference between secured and unsecured debt is the existence of collateral to back the credit granted. Secured debt exists when assets insure repayment. For example, a mortgage is a secured form of debt. In this example, the house secures the loan. Another example is an auto loan. The automobile secures the loan. In both examples, if the borrower defaults on the contract, i.e., repayment does not occur per the terms and conditions of the contract, the creditor may then foreclose on the home, or repossess the automobile. Unsecured debt is the exact opposite. A securing interest does not exist. If default occurs then there is no collateral to satisfy the agreement in lieu of payment.

Not only is debt secured or unsecured it is also either revolving or installment. The best example of revolving debt is a credit card. Once the amount borrowed is paid, it is available to use again. Credit cards are either secured, with a savings or deposit account, or unsecured. Installment debt is a set amount paid in installments over time. Once the debt is paid, the contract is satisfied. An auto loan is a great example of secured installment debt. A signature loan is an example of unsecured installment debt. Signature loans are granted based on the credit worthiness of the borrower, and do not require collateral.

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