Explain Debt

In your day-to-day life, you probably encounter or use a variety of types of debts. The Federal Reserve estimates that the total amount of United States household debt, which includes credit cards and mortgages, was $10.3 trillion in 2010, according to the Wall Street Journal. Understanding what debt is and how it affects you is key to becoming an informed consumer.

Debt Basics

Debt, at its most basic level, is something you owe to someone else. Typically, when people refer to debt, they are talking about consumer debt. Consumer debt is any debt used or acquired by a consumer. This is different from institutional debt, which generally is any debt held by governments, companies or other organizations. Consumer debt is measured by the amount of money a consumer owes to a lender, typically either a bank or other institutional lender.

Types of Debt

Consumers use a variety of debts, though not all consumers use the same kind. Many consumers, for example, borrow money from a bank or lender to buy a home they otherwise could not purchase, because they do not have enough money to buy the home outright. This debt, known as a mortgage, allows people to buy the property and live in it while making monthly payments to the lender. Credit cards, another commonly used form of debt, are considered a revolving debt, because the total amount owed depends on the cardholder's use of the card and the amount of debt paid off each month.

Debt Fees

Lenders do not give away money without receiving compensation. Typically, a lender who offers a borrower a loan requires the borrower to pay the loan back over time with interest. Interest is usually charged as an annual percentage rate (APR). For example, if you take out a $10,000 loan with a 5 percent APR, you pay $500 per year in interest fees to the lender.

Government Debt

The term debt also is often used when referring to the federal government's debt, known as the deficit. Governments, like businesses and consumers, depend on income when they spend money. When a government spends money, known as an outlay, it gets that money either through its income, typically in the form of taxes, or borrows money from others. When a government has to borrow money, it runs a deficit. The total of all deficits the government has acquired is known as the national debt.