Types Of Credit
When you think about the different types of credit available, credit cards probably come to mind first, but there are actually four basic types of credit. It is important to understand each type of credit and how it works, to avoid unnecessary charges and get the most for your money.
- Service credit. This is the most common type of credit, although you may not think of it as credit. Service credit refers to your monthly payments for utilities and other services used in the home—water, electricity, gas, telephone, cable or satellite TV, and Internet service. Most service companies require a deposit before they will extend a service. If they do not receive your monthly payment on time, they will likely charge a late fee.
- Loans. Loans allow you to borrow cash from a bank or loan company. Some loans are secured, which means that you pledge an asset as collateral for the loan. If you fail to repay the loan, the lender can seize and sell your collateral to repay the loan. Unsecured loans, sometimes called personal loans or signature loans, do not require collateral. Some loans require a lump sum repayment. However, most loans are repaid in several regular monthly payments until the entire loan amount—plus finance charges—are paid in full.
- Installment credit. This type of credit is sometimes called "buying on time." An auto loan is the most popular form of installment credit. Other examples of installment credit include appliances and furniture purchased with store financing or "easy payment" plans. Installment credit usually requires a down payment, a contract, and your agreement to pay the balance in equal payments called installments. The payments include finance charges, and the purchased item becomes security for the loan.
- Credit cards. Banks, stores, and businesses issue credit cards. A credit card is basically an interest-free loan—if you pay your bill in full each month. If you pay only the required minimum payment, the creditor will charge interest. Interest rates for credit cards are usually much higher than for other types of credit. And expect to pay additional fees for things like late payments or charges over your credit limit.