How to Prevent Unsecured Credit From Becoming Unmerciful Debt

Yesterday I shared the differences between Secured Debt and Unsecured Debt.

Today, I'll dig a little deeper into the down-side of Unsecured Credit - the Unmerciful Interest Rate Mark-up


Unsecured Credit is any credit that requires "no money down". The Creditor/Lender [code name: 1st Party], "loans" the Debtor [code name: 2nd Party], money in the form of "Credit". Unsecured Credit has no Collateral/Money to "Secure" the loan.

The 2nd Party HAS to pay the credit back to the 1st Party, plus 'interest', as marked-up by the 1st Party [aka Lender]. Interest is extra money charged to the Debtor (2nd Party) for using the credit as outlined in the Terms and Conditions of the Credit Agreement.

PRIME Rate Vs. LIBOR Rates: Unmerciful Middle Man Mark-ups
There are two active rates that most Credit Cards have:

1. Prime Rate [code name: U.S. Federal Funds Rate -Fed Rate]: The PRIME rate is typically more steady (long-term) than LIBOR, but historically a higher rate.
   
   
2. LIBOR Rate [London Interbank Offered Rate]: LIBOR is usually a short-term rate. LIBOR adjusts frequently so be careful if you have a LIBOR. It's your DUTY and responsibility to know what your rate is.

The way it works is:

• 1st Party Lenders (Middle-Man/Woman) borrows money at very low rates. Next the 1st Party will mark up the difference to make an obscene profit.
  
  
• When the 2nd Party [YOU] borrows from the 1st Party [Lender], they 2nd Party AGREES to pay back what they borrowed and any extra funds or fees that the 1st Party charges (see chart for details?).
  

For example, say your Bank borrows money at 6% Interest from another Lender. The the 1st Party will add on another 6% Interest for a total of 12%. When you (the 2nd Party) borrows from the 1st Party you could see an ADDITIONAL MARK-UP of 6%, for a total of 18% Interest (or more) for a that unsecured credit.

1st Party Creditors Borrow at 1.50%, but charge the 2nd Party 12% to 33.24%? This is unmerciful Lending! The 1st Party borrows at a very low rate (PRIME currently 1.50%, LIBOR currently 4.14% TO 4.17%), then "marks it up" and you'll pay back an amount up to 33.24%!

What can you do about it? Find out what rate your Credit Card is based on (PRIME or LIBOR). Keep track of the rates, and negotiate for lower rates whenever you can.
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DEBT WARRIORS™ are not Attorneys. The information on this blog, should not be considered legal advice. If you need to speak with an Attorney click here:
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