Different Types of Credit
We’ve talked about credit as a concept, and we’ve explored the most common form of credit—credit cards. But credit isn’t one size-fits-all. Just like there are many different forms of money, there are manydifferent forms of credit. You may also encounter or use credit as…
Certainly, the most common form (and application) of credit is a credit card. A credit card makes use of “revolving credit.” This means that the borrower can use any amount of credit up to their credit limit. You can use the card as frequently as you like, as long as you don’t exceed your limit and you pay at least the minimum payment on time. As you pay off what you owe, the balance of available credit is renewed each month.
Let’s say you have a credit card with a $500 limit. In January, you use the card to buy a $250 smartphone. At the end of the month, you can choose to make the minimum payment of $50 or you could pay off your entire $250 balance. Whichever you choose, the remainder of your credit limit will automatically be available to you in February.
Non-revolving credit is more similar to a fixed loan than a common credit card. With non-revolving credit, the borrower pays what they owe until the entire balance is paid off. During this time, new credit is not extended to the borrower.
For example, a car loan is non-revolving credit. A borrower uses $5,000 of non-revolving credit to purchase a car. The borrower pays back that $5,000 according to the terms and conditions of their contract. As they pay, no additional credit is made available to the borrower. Once the loan is paid off, the borrower is under no further financial obligation.4
If you have bad—or no—credit, it can be difficult to qualify for a credit card. In this case, a secured credit card is a solution you may consider. A secured credit means that the credit is “secured” with collateral. The collateral is a cash deposit that’s required before the card can be activated. For instance, if you deposit $1,000 into the card, that is your credit limit—you can’t use your card to spend more than that.
If you manage your use of the card well over time, your creditor may choose to grant you additional credit without requiring a collateral deposit.
Secured credit cards are offered by credit unions, as well as other lenders.5
Unsecured credit is—yes, you guessed it—the opposite of secured credit. It doesn’t require any collateral to secure the credit. Most credit cards are unsecured. The creditor awards the borrower credit based on their creditworthiness, not on any collateral.
If the borrower fails to repay their balance, the creditor may pursue repayment through a collections agency or legal action like wage garnishment.6
A short-term loan is also a form of credit. A short-term loan is, very simply, the act of borrowing money from a lender. The lender will almost certainly charge you interest and fees for the use of the principal that you borrow.
There are many different types of short-term loans and lenders. Some are safe (like personal installment loans) and many are not (like predatory payday and title loans). To learn more about Personal Loans, visit the OppLoans product pages.
Table of Contents:
- Workbook Objectives
- Part I: Credit
- What does Your Credit Mean?
- Why is My Credit So Important?
- Let’s Make it Personal
- Expert Advice
- Credit Cards
- Who Offers Credit Cards?
- Credit Reflections: Credit
- Different Types of Credit
- Common Credit Mistakes
- Credit Card Tips
- Credit Quiz
- Part II: Understanding Your Credit Report
- Part III: Understanding Your Credit Score
- About The Experts
- About OppLoans
- Works Cited
- Part I: Credit