September 24, 2017
 
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Credit Counts: Types of Credit

When used responsibly, credit can be a convenient and effective tool to make purchases. Sometimes credit cards are useful even when you don’t intend to charge anything, such as to guarantee a hotel room. Credit comes in many different forms. Here are the most common:

 

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, a fee, called interest, will be charged. Also, as the money is paid back, it then becomes available again to borrow. The most common types of revolving credit are credit cards such as VISA, MasterCard, store, and gas cards.

 

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 defined purpose. 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 the set monthly payments. Most people are familiar with installment loans for homes and cars.

 

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.

 

Most loans come in the form of 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 fails to repay, the lender takes the item as repayment.

 

By contrast, unsecured credit does not require any guarantee.

 

 

 

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