Types of Credit

There are 3 types of consumer credit, and it is important to be aware of what they are. First there is non-installment credit, which is credit that is paid back to the lender in 1 payment set at a predetermined amount and due date. Then there is installment credit, which is a line of credit that regular payments are made on. An example of this would be a mortgage. Finally we have revolving open-end credit, which is a line of credit that is guaranteed to be a certain amount, and as you pay the balance down, it frees up more credit for you to be able to use. An example of this is a credit card.

Out of the 3 main types of credit, there are also 2 categories. Those are secured and unsecured credit. Secured credit is something that is backed up with collateral, like a house, car, or other property. The creditor assesses the value of the collateral item, and extends a line of credit equal to that amount. This is a good option for people who do not have a very good credit rating. Unsecured credit, on the other hand, is for those who have good credit ratings, but the interest rates are normally much higher than they are with a secured line of credit. Credit is extended to people by financial institutions like banks, credit card companies, and loan offices. When you go to apply for credit, the financial institution evaluates your situation in order to decide whether to extend a line of credit to you, or not.

Having credit has its advantages. The main one is being able to buy now and pay later. This lets you use your purchased item, without having to pay for it all at once. Another advantage is that it is safer than cash, and you are protected against fraud. Also because you have credit, you do not need to carry much cash, and you have enough to cover most emergencies that might come up. When used properly, it can be a good tool for helping you budget, and that will give you a good credit record, which opens up more possibilities for you.

Credit also has some downfalls. It can make you more susceptible to impulse purchases, which can make you spend more than you can afford with the high interest rates. Since tomorrow is not guaranteed for anybody, credit can get you into trouble if you lost your job or something like that. Even though you lose your job, the bills still come in, and if you are not able to pay those on time, then it will ruin your credit rating and your stuff will get taken back by the creditor, leaving you penniless, and without anything to show for all of the hard work you put into getting your possessions. Also, creditors are in the business to make money, and the “I want it now” person with a line of credit will not be very likely to have a very healthy savings account, with all of their money going to the creditors.