The Big 3 Types of Credit You Need

April 12, 2019

Our world runs on credit. It wasn’t always that way, but now it is a rarity that people pay cash. They use their debit cards for small purchases but for major purchases, like cars, furniture, celebration dinners with friends, credit rules the world.

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 we use them for buying items that are everyday staples.

It hasn’t been that long since credit cards were not supposed to be used for groceries or gas or utility bills. Now, many places of business frown on accepting cash and would prefer to have as few cash transactions as possible.

That means credit, not cash is now king.

There are three major types of credit that most people use. It is important to have all three, but you don’t need 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 to Help With Everyday Life

This is a type of credit where you have a credit limit. This is the amount of money you can borrow to pay for goods and services. Credit cards are the most familiar form of revolving credit. Basically, 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.

Credit cards and other forms of revolving credit often have high limits. This is to encourage the borrower to use the cards as much as possible and still be able to pay.

That philosophy works for being able to buy what you want but does not help your FICO score, which is a measure of your creditworthiness.

When you buy something using revolving credit, it’s best if you pay that balance off right away. In the real world, most people don’t do that and they carry over numerous credit balances from month to month.

Installment Credit For Big Purchases

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

In an installment loan contract, a creditor loans you money to buy something. They pay the merchant who sold the item to you 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.

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 or 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 to credit to get along in the world. Making sure you can always meet your credit repayment obligations is an important part of life. Make sure no matter how many offers you get for credit cards or loans that you stay in charge of your finances.