Understanding Types of Credit You Can Get

Two key ways credit can differ

Not all credit works the same way. Different types of credit have different requirements you need to meet to get it and different requirements for paying it back. There are two big distinctions you need to know.

Installment credit vs revolving credit

• Installment credit allows you to borrow a set amount of money that you get in one lump sum. Then you pay it back over a set time.
  • Loans are installment credit. So, if you take out a $5,000 loan, you get $5,000 from the lender and then you pay it back over a set number of months or years.
• Revolving credit allows you to get an open credit line with a certain limit. You can borrow against that credit line whenever you want. The payments are usually equal to a percentage of your balance.
  • Credit cards are revolving credit. You get approved to have a credit limit up to a set amount. Then you must make minimum required payments each month that you have a balance on the card.

Secured credit vs unsecured credit

• Secured credit requires you to put something of value up to get the credit, also known as collateral. If you don’t make the payments on time, you can use the collateral you put up.
  • Car loans are a good example of secured credit. The vehicle your purchase is used to secure the car loan. If you don’t make the payments on your loan, the lender can repossess (take) the car you purchased.
• Unsecured credit doesn’t require collateral. You’re basically on the honor system that you will pay the debt back. If you don’t, be aware that the person you owe can sue you to force you to pay them back.
  • Most credit cards are unsecured credit. You get approved for a credit card based on your credit score. However, there are secured credit cards that require you to use a cash deposit to open the card.

Risky types of credit

Not all types of credit are good for you. There are risky types of credit that come with high costs and unfair repayment terms. They’re basically designed for you to fail so the company can profit off of your misfortune.

Here are two types of credit you want to avoid:

• Title loans are a type of credit where you offer the title of your car in exchange for a loan. Their goal is usually for you to fail to repay the loan so they can repossess your car.
• Payday loans are loans that offer instant cash that you’re supposed to pay back with your next paycheck. But they’re expensive—you can pay as much as $30 for every $100 you borrow. And payday loan companies target people they know won’t be able to pay loans back on time.

Smart Money Tip: Don’t trust credit that’s too good to be true

Anytime you’re offered credit with promises of “instant cash” or “no credit check required” be careful! Like anything in life, if a type of credit sounds too good to be true then it probably is.

Predatory lenders are people that seek out people with weak credit profiles. They offer to fix the situation but really, they’re just out to prey on people’s weaknesses to make money.

Don’t get caught by predatory credit products. If you’re surprised someone will give you credit on the terms being offered, it’s probably a trap.