Ready to dive into the wonderful world of credit? We’re about to take you on a wild ride through the common types of credit you can get in 2023 and cover your expenses. Whether you’re dreaming of a new car, a tropical vacation, or simply need extra cash flow, understanding the various available credit options is essential. Here is what you need to know:
What is Open Credit?
Open-end credit accounts are a golden ticket allowing you to buy and pay for stuff later. You borrow money from the bank or a revolving credit card company with the promise that you’ll pay it back on the set repayment term. In comparison, when you get a closed-end credit, funds are dispersed in full when the loan closes and must be paid back, including interest and finance charges, by a specific date.
When you use different types of loans, it’s not a funny game. You’re borrowing money, so you must be responsible and pay it back if you don’t want to have bad credit. If you don’t, you’ll face some not-so-fun consequences, such as high-interest rates and a negative effect on your credit score.
As you know, there are different types of credit that you can get to cover each expense, be it a house, a car, or just some goods or services. You must understand every type and know how their features can help you save the monthly budget.
Types of Credit Examples
Bank credit accounts are a big part of our lives, but did you know there’s more to it than just one credit? We will explore different types of credit that can save your financial situation. So you can choose wisely before you use any financial tool.
Installment Credit Definition
So, imagine you want to buy something for your home but don’t have enough cash to pay for it all at once. That’s where installment credit accounts come into play. Installment credit refers to buying and paying for stuff within fixed monthly payments. Instead of forking over all the money upfront, you make payments on installment accounts over a set period until you cover your debt.
Here’s how these credit accounts usually work: You sign up for installment credit with a lender, and they’ll immediately give you the money. Then, you’ll have to pay installment loans back in equal installments, typically including interest and other additional costs. These installments are spread out over a predetermined period, such as a few months or even a few years.
Revolving Debt Definition
If you don’t want a fixed repayment term or sometimes can cover the debt on time, try revolving debt. When you have revolving credit accounts, you can borrow up to a credit limit and repay it at your own pace. It is a never-ending cycle, so it’s called “revolving credit.”
Imagine you have a revolving credit card with a $1,000 credit limit and need something to buy up to this amount. So you do it and receive a bill with the amount you owe. Usually, a revolving credit card issuer requires you to repay the total balance or just the minimum payment, which is generally a tiny percentage of the total. However, be aware that the remaining balance will accrue interest, which can create a credit card debt trap.
Do you want to avoid long-term commitments that come with revolving credit accounts? Try a single-payment credit such as a payday loan. You can repay these unsecured loans in one lump sum with interest and don’t have credit limits. The maximum term is 30 days, which is perfect for expected needs. Financial experts recommend borrowing a small amount to be sure you can repay it with a single payment on the due date. Such a financial product can improve your credit mix and show loan providers you can manage your credit account.
Trade credit allows you to purchase goods or services from businesses without paying for them immediately. Usually, a business owner sets various terms in 30 days or longer on store credit cards. It allows you to adjust your budget and quickly buy what you need without waiting for your paycheck. If you don’t cover the trade debt of your retail credit cards on the due date, businesses can charge interest for every day you’re late with a payment.
Which Types of Credit are Most Similar to Each Other?
After all these financial terms and definitions, only two credit types are most similar: open credit and revolving debt. They share similarities in terms of flexibility, while installment credit has fixed repayments over time.
Next, trade credit accounts allow you to take credit from a business instead of paying them for goods or services, and single payment credit is a one-time payback deal. Each type has advantages and disadvantages, making you think twice before borrowing them. So choose wisely based on what suits your needs and financial situation.
How Does Each Type of Credit Affect Credit Scores?
You’re probably aware that credit scores are like a report card for your financial life. It tells lenders how responsible you are with money and helps them decide whether they should lend you more cash. Now, let’s talk about the different types of credit and how they can have an impact on credit scores:
If you use your credit cards wisely and pay off your bills on time, they can boost your credit score. It shows that you’re capable of handling borrowed money responsibly. But your FICO score will suffer if you have missing payments or lenders make a credit verification when you apply for a card.
This type of credit includes things like car loans or personal loans. When you make regular, on-time payments, it shows that you’re a reliable borrower. It can have a positive impact on credit scores. But beware, missing payments or defaulting on these loans can damage your FICO score.
Having a mortgage and making timely payments can boost credit scores. These credit types show lenders that you’re capable of handling substantial debt. But again, defaulting on your mortgage payments will decrease your score in several weeks.
Student loans can also help build your credit score when you make regular payments. Lenders like to see that you’re responsible for those education debts. But, you guessed it, failing to make payments or going into default can seriously tank credit scores.
Personal Lines of Credit
Similar to credit cards, they give you access to funds, but you only pay interest on what you borrow. Using personal lines of credit responsibly and paying them off promptly can provide your credit score with a decrease. Conversely, misusing or neglecting them can knock your credit score down.
How to Build Your Credit History?
Building credit is like leveling up in the financial world, and it can open up many opportunities for you down the line. Here are some tips to get you started:
Get a Credit Card
Borrow a secured or revolving credit card and make the payments on time. Secured credit cards will help you build your payment history step by step while you purchase services or stuff for your home. Sometimes, a secured credit card is also helpful for paying medical bills or education expenses.
Pay Your Bills on Time
Having late payments will decrease your credit score and worsen your credit history. So, don’t miss any bills and their due dates. Set reminders and put aside extra dollars in an envelope to be sure you have enough money to make the payments on time.
Keep Your Credit Utilization Low
The credit utilization ratio shows lenders how often you use your credit card or other loan products. Financial experts suggest consumers have a low credit utilization ratio by keeping it under 30% to avoid problems with future loan approvals or additional credit accounts.
Diversify Your Credit
Having different types of credit, like credit cards, personal loans, student loans, or car loans, can help you boost your credit score and improve your credit history. A credit mix, including revolving accounts, shows lenders you can manage your finances and cover different types of credit on time. Also, you apply with lenders that perform no credit check through credit companies.
Check Your Credit Report
You can get free credit reports from credit bureaus once a year. Verify all the errors and mistakes in your payment history. You can file a complaint and get them out if something is wrong.
Borrowers can’t create credit reports overnight. It takes time and good-settled moves they take every day. Discuss with a credit counselor and ask all about improving your financial situation. If you don’t have enough money to pay, try free counselor services at different ONGs.
Everyday expenses can crush your budget in several weeks, and credit application seems the best solution, especially when you want to build credit. But before applying for one at the financial institution, it is crucial to understand the different types of credit available on the market and see if you can make the minimum payment. Be it a revolving credit account, an installment loan, a personal loan, or a home equity loan, choose wisely and save your financial standing.