The Big 3 Types of Credit You Need

Credit has become increasingly commonplace in today’s world. People use their debit cards for small purchases, but often opt for a credit card or loan for major purchases like cars, mortgages, or even things like weddings or furniture.

Buying things online has made the world a different place. Credit cards are a way of life now. Before they were used mostly for a special purchase, but now they’re frequently used for buying items that are considered everyday staples.

There are three major types of credit that most people use. It is important to have all three, but you don’t need to go out and apply for all of them at once. Here is a synopsis of the three types to help you understand what they are and how they work.

Revolving Credit

This is a type of credit where you have a credit limit, which is the amount of money you can borrow to pay for goods and services. Credit cards are the most familiar form of revolving credit. When you use your credit card, you are borrowing money from the card issuer.

That card issuer pays the merchant and you are now responsible for making payments to the issuer of the card. A revolving credit line means that as you pay off the balance on your card, you can use that credit again. This is where the term revolving credit comes from.

Interest accrues on the outstanding balance, increasing how much you owe overall. When you buy something using revolving credit, it’s best if you pay that balance off right away. There’s no set repayment term, which allows that outstanding balance to grow over time.

Installment Credit

Installment credit is typically used for larger purchases. Mortgages are a form of installment credit, along with vehicle loans, student loans, and personal loans for a major purchase like appliances or furniture.

In an installment loan contract, a creditor loans you a lump sum of money to buy something. They pay the merchant who sold you the item and you now owe the creditor who issued the loan.

When you use revolving credit, your payment can vary from month to month depending on how much you use your card. With an installment loan, your payment is a fixed amount each month, which ends after a set period of time.

Keep your Lights On with Service Credit

The other type of credit used most often is service credit. This is how your cell phone, electricity, gas, and other utilities work. You use those every day and the company who provides them to you gives you credit for that amount rather than collecting money each day for what you use.

It’s simple, it works well, and if you don’t pay they can always cut off your service.

We all need credit to get along in the world. Making sure you can always meet your credit repayment obligations is an important part of life. Stay on top of your payments and you’ll build a great credit history that qualifies you for the lowest rates in the future.