Different types of credit

You have different types of credit available for you

Credit represent an agreement between the borrower and the lender. The borrower is given certain value, with the obligation to repay the same later on. Most forms of credit bear interest, and you are charged accordingly. There are different types of credit offered by banks and other lenders. The credit can differ in terms of its purpose (personal loan, credit card, mortgage), the way it functions (revolving or non-revolving), payment structure, and the need for collateral.

Credit cards

Credit card is one of the most used forms of credit. This form of credit is offering the convenience for users to borrow money from their bank or a credit card issuer. Credit cards can be used for purchases and for withdrawals of cash, and there are different types of credit cards available depending on the purpose or the issuer. This form of credit is also called revolving credit because of the way in which the available credit is repaid and reused.

Bank loans

Loans are another form of credit available for customers. This form of credit can be in the form of loans repaid through monthly installments for a pre-defined time frame. This credit type is not a revolving, because, the repayment of principal is final, and cannot be reused as it is the case with credit cards. In order for new credit limit to be available, you should go through the application process and get approved again. There are different types of loans, depending on the purpose they are used for (mortgage, car loan, etc.), the need for collateral, the target customer group, etc.

Overdrafts

Overdrafts are form of credit which allows you to withdraw money even when your account balance is zero. The overdraft limit is defined by the bank on the basis of your account history, income, spending habits and needs.

Higher purchase loans

Higher purchase loan is a form of credit which is aimed at the possibility for purchasing goods. In accordance to the agreement of this type of credit, purchased good will be owned by the borrower, once the purchase amount is paid back. In case, you have late payments, creditors can ask the goods back.

Secured credit

This credit is a form of credit backed by some form of collateral. The type of collateral needed, to some extent, depends on the type of loan. For instance, a mortgage loan commonly is guaranteed by the property purchased, or some other property. Car loan can be backed with the car purchased. In case the borrowers is not servicing its credit regularly, creditors, can take possession of the collateral.

Unsecured credit

Unsecured credit is opposite of secured credit. Meaning that, with the unsecure credit you don’t need a collateral. Stated differently, unsecured credit is not guaranteed by a collateral. In case of borrowers default, the credit will not be paid back.

Non-revolving credit

This form of line of credit is usually referred as an installment credit. With this type of credit you should pay a fixed monthly payment. The payment is made until the principal amount is paid in full. Example of a non-revolving or installment credit is mortgage. You cannot reused the fund over and over again. Once you make the payment, the principal amount is reduced.

Revolving credit

As it has been mention, credit cards a one of the best representatives of revolving credit. Having a revolving credit means that you have a certain amount of credit limit available. You can access these funds whenever you want, and use them over and over again. You are obliged to pay the minimum amount on your outstanding balance defined each month.

Service credit

A type of credit where the outstanding balance should be fully repaid at the end of the month. With this type of credit your debt is not transferred to the next month. In addition, the outstanding balance is not repaid through installments. Some examples of service credit are: cell phone accounts, utilities or charge cards. In most cases this form of credit is not recorded on your credit report.

Short-term credit

A payday loan can be a good example of a short-term credit. This form of credit is secured against your next paycheck. The downside of short-term credit is that it is relatively expensive form of credit. Interest rates on short-term credit can be up to couple of hundred percent.

Understanding the different types of credit available will ensure that you will choose the most adequate one for your needs. In addition, having different types of credit accounts on your credit report is demanded by the lenders. It shows that you are able to cope with different accounts and manage your finances accordingly. The different types of credit you have are capturing 10% of your credit score. Consequently, you should try to have a various credit accounts in your payment history.

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