What is Credit
Credit is a contractual agreement in which a borrower receives something of value now and agrees to repay the lenderat a later date. It allows you to buy now with the promise of paying later. By understanding how each type of credit works, you will learn to manage credit successfully.
Types of Credit:
1. Loans
Loans let you borrow money that must be repaid with interest. You can obtain a loan for a specific purpose, such as financing a new car, paying college tuition, or buying or renovating a home. Loans are generally divided into two types: secured and unsecured.
Secured loans are guaranteed by collateral, which is an item of equal or greater value than the amount of the loan, such as a car, home or cash deposit.
Unsecured loans do not require collateral and are made based on your credit score and ability to repay. Examples of unsecured loans include credit cards and student loans.
2. Installment Loans
Installment loans are made for a fixed amount at the time of your application and approval. This type of loan is repaid in fixed monthly payments over a specificperiod of time. The interest charges are included in the payments. Auto loans and mortgages are examples of installment loans.
3. Credit Cards
Credit cards are perhaps the most common type of personal credit. Unlike installment loans, credit cards allow repeated transactions up to a maximum credit limit, also known as your available credit limit. Each time you charge something, you are borrowing the money until you pay it back. If you decide to pay the money back over time, the credit card company adds interest charges to your account. Each month, you will pay a calculated amount until the borrowed amount is paid in full.
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