- January 24, 2020
- Posted by: aarfinancial
- Category: Economics, Finance & accounting
The basic type of credit most of us are familiar with is to pay your debt down before saving. However, there are other types of credit today, and they can be further divided into four types.
Revolving credit: The most common revolving credit is a credit card. A borrower is given a certain credit line for consumption and is not expected to exceed the credit line. Unlike ordinary loans, the borrower can continue to hold and use the previously obtained credit line after repayment. For example, Jack is approved for a credit card with a limit of $1,000. Unless the amount is increased/decreased by his bank, Jack has a limit of $1,000 available as long as he repays in time after consumption.
Charged card: Charged card is like a credit card, but you must pay off your bills every month. You cannot carry the arrears to the next month, like using a credit card. Another big difference from credit cards is that charged cards generally do not have pre-set limits. However, it does not mean an unlimited limit. The card issuer sets a floating limit regarding the user’s consumption situation/asset status/credit history. Usually, the user does not know the floating limit, while the credit card limit is relatively fixed and visible.
Service credit: Hydro bills, phone bills, and gym memberships are examples of service credit. These merchants usually sign contracts with clients and offer a service period. Clients have access to the merchant’s services/products during the service period and pay the fees as agreed. Service credits rarely appear on credit reports, but service credit defaults can affect credit records negatively.
Installment payments: House loans and car loans are two typical types of installment payments. The borrower obtains a loan at the site and agrees to repay the loan in installments within a pre-determined period at a certain number of times and intervals (e.g., 36 months). Installments usually require an additional amount of interest, depending on the loan interest rate of the loan company. Also, according to the types of contracts, the borrower may choose to pay in advance to avoid paying interest.
If you are interested in learning more about how a credit bureau prepares your credit report, please follow the links below: