Credit Counts: Different Types of Credit

When credit is used responsibly, it can be a convenient and effective tool to make purchases. In addition, credit cards are useful when you don’t intend to charge anything, such as to guarantee a hotel room. Here are the most common types of credit: 

Revolving Credit
This allows you to borrow money up to a certain amount. The borrower can either pay the money back in a lump sum at a certain time, or over an extended period of time. If the borrower chooses to pay it back over time, interest will be charged. Also, as the money is paid back, it then becomes available to borrow again. Credit cards like VISA, MasterCard, store, and gas cards are the most common and recognizable types of revolving credit. 

Installment Credit
This is when the borrower finances something through a store, for example, for a specific amount of money at one time for a specific purchase. The borrower agrees to a repayment plan, typically to be paid on a regular basis over a certain period of time. Interest is pre-determined and calculated into set monthly payments. Most people are familiar with installment loans for homes, cars, and furniture. 

Non-Installment or Service Credit
This allows the borrower to pay for a service at a later date. Typically, if you pay in full within a specific time frame, you don’t have to pay fees or interest. However, if you don’t pay within the specified time, there will probably be penalty charges. Utilities such as telephone, gas, electricity, and water are examples of companies that offer service credit.

Loans are either secured or unsecured credit.

Secured credit requires the borrower to provide something of value to guarantee that the loan will be repaid. It is usually for installment loans. If the borrower defaults, or fails to repay, the lender takes the item as repayment.

By contrast, unsecured credit does not require any guarantee. Typical charge cards are unsecured. If you default, there is typically nothing the lender can “repossess” since we can charge items such as food and gas that are consumed. However, you can be sued for the money.