When you want to improve your finances, it is important to understand the different types of credit. There are three categories, including installment credit, open credit, and revolving credit. When you have credit available to you, it shows that a lender has confidence that you will make your payments on time. You can buy things and pay for them over time, or you can take care of an emergency. Continue reading to learn about different types of credit.
Secured Vs. Unsecured Credit
Secured credit is a loan that is guaranteed by collateral. This might include a mortgage, which uses the house as collateral, or an auto loan, which uses the car. Some companies let you make a deposit and have a secured credit card. They keep the deposit in case you default, and you make payments as you would on an unsecured card.
Unsecured credit is based on your creditworthiness. It includes personal loans, credit cards, and student loans.
Revolving credit includes credit cards, home equity lines of credit, or personal lines of credit. You have a credit limit, and you can use as much or as little as you like. You make monthly payments, but you are free to pay it off anytime. The minimum payment is usually a percentage of your balance, but there might be a minimum. It is important to remember that you want to keep your usage low on this type of credit because your credit usage is a large factor in your credit score.
With installment credit, you borrow a specific amount of money, and you make payments in the same amount every month. This is a one time loan, so you don’t have credit available as you pay it down. Your goal is to pay it off. This type of loan is for a home, a car, or it could be a personal loan. You are allowed to pay off these loans early in many cases. Most of the time they are secured. For example, mortgages and auto loans are often installment loans. You will find some of this type of credit that isn’t secured, such as personal loans.
The third type of credit is called open credit. There may not be a preset limit, and you are expected to pay the full amount each month. Utility bills are often set up this way, and charge cards are open credit. You may have an account at a store or with a contractor.