When used wisely, credit can enhance your life. It allows you to purchase things like a home, a car, and even finance a college education. Credit comes in many forms: credit cards, charge cards, car loans, mortgage loans, home equity loans, personal loans, consolidation loans, student loans, and more. When you use credit, it becomes a debt.
To purchase an item on credit means that to get the item now, you are willing to pay extra for it (called interest). Whenever you use credit, you should calculate the true cost of an item, which will include all fees and interest you pay. It is not uncommon for people who make purchases on credit to spend two to three times more than if they were paying cash for the purchase.
This month, we’d like to highlight the most common types of credit include: revolving credit, installment credit, and service credit.
Revolving credit allows you to borrow up to a specific dollar amount. The monthly payment may vary as your balance changes. As you repay the credit, you will be able to borrow it again. Credit cards are revolving lines of credit.
Installment credit allows you to borrow a specific amount, for a specific period of time. The monthly payment usually remains the same. When you have repaid the amount, the loan is closed. Car and mortgage loans are considered installment credit.
Service credit allows you to pay for a service at a later date. If you cannot make the payment in the agreed upon time, there is a penalty. Utility companies offer this kind of credit.
Having a good mix of both revolving and installment accounts reflects positively on your credit score. Keep reading in the next few months for more information about what your credit score means to you!