Different Types of Credit

MAR 25, 2015

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During the course of your life, as you turn to the credit system for financial support, you will have a variety of credit options to choose from. Should you choose to utilize credit to fund any of your life’s endeavors, lenders will first determine whether or not you are eligible by checking your credit score. If you get approved for financing, the account will become a trade line on your credit report. Enter into these commitments knowingly: some credit accounts are viewed more favorably by lenders than others, and all require the ability to repay your debts in a timely manner.

Credit is first defined as revolving or non-revolving, as characterized by your payment structure.

Non-Revolving Credit
Non-revolving lines of credit are also known as installment agreements. This type of account requires you to pay a fixed monthly amount (or more), until the principal is paid off in full at which point the account is closed. Mortgage, auto and student loans are examples of non-revolving credit lines.

Revolving Credit
Monthly payments on revolving lines of credit, such as credit and department store cards, fluctuate based on how much credit you have used and how much you choose to pay off each month.

Secured Credit
Secured credit refers to loans secured by an asset, such as your home or car. This type of credit is considered a safer risk on behalf of lenders. Reason being: if you default on your auto loan, the lender has the legal right to repossess your car.

Unsecured Credit
Unsecured credit, in contrast, does not involve putting down collateral to obtain financial resources. This type of debt typically refers to credit and retail cards. Carrying too high of a debt-to-credit ratio will cause your credit score to suffer.

Short-Term Loan
A pay-day loan is a short-term cash advance secured by your next paycheck. This is an example of a risky type of credit, namely because they come with sky-high interest rates, which often trap borrowers into a dangerous cycle of debt. If you are forced to take out a short-term loan, make sure you pay it off as soon as you can to avoid falling further into debt and damaging your credit score.

Lenders like to see a number of different types of credit on your credit report because it proves how you have managed your finances across several accounts over time. In fact, the variety of credit accounts you carry comprises 10 percent of your credit score, so it is important to build a diverse history.

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This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2015 ConsumerInfo.com, Inc. All rights reserved.