Types of Credit
One of the most frequent questions we get asked by teens and young adults is about credit. And that often begins with what the basic types of credit are.
There are different types and they all have a different purpose.
1. Installment loans: These are loans are for a fixed amount and are usually for things like cars or homes.
Big purchase like that will almost always require credit even though sometimes cash is used but I that’s not as common.
Most likely the loan will also have a set interest rate. Interest rates change over time and are determined by many factors. The rate available today may be different in six months so its best to shop around and see what rates are available. Also, keep in mind that your credit score will play a big role in what your rate is.
The loan is also for pre-determined length or term. Auto loans can be as long as 6 years where a home loan can be 15, 20 or 30 years in length.
You will pay installments or payments for the time that was agreed upon in the amount that was agreed upon. Once you have completed the payments the loan is paid off.
2. Revolving credit: This is for things like credit cards.
Payments on this type of credit varies depending on the balance owed. There is no set length of time for payments. A line of credit like this will have a credit limit and the entire amount doesn’t have to be used at one time. You can just use what you need.
Its best to use what you need and pay off the balance.
Credit cards can be issued from a variety of financial institutions as well as big box retailers.
Credit cards often have a variable interest rate. Which means it changes as interest rates in the market change. Just like an installment loan, the interest is the cost of borrowing and the higher the rate, the more that purchase will cost in the long run.
There may be occasions where credit card companies will offer special rates. In this instance it’s always a good idea to read the fine print. The interest rate can change and there are always rules that apply so be sure understand to read and understand what agreement you are signing.
Also be aware of the dangers of credit card debt. It’s easy to continue to put your credit card down for purchases and run up a balance that can be difficult to get out from under that debt.
3. Service credit: This is for things like an apartment lease, a cell phone or even utilities at a home or apartment.
Some of these agreements have terms, like a lease, others like utilities last as long as they are needed for the residence.
If you have no established credit, a co-signer may be a good option for a loan or contract.
Bonus… There are also just good old fashioned cash loans. This tends to be a more personal transaction between friends or family versus a business. So those terms are up to the people involved. I would be careful with those types of loans. Unfortunately, we’ve all seen money come between a relationship so handle those with care to avoid hurtful behavior.
And as always, we are here at first pioneers if you need us to discuss loans, credit or other financial needs.