What are Different Types of Credit and How it Affects You
You may think that all credit is really the same thing. However, there are different types of credit that can have a different impact on your credit score. Understanding these different types of credit can be a huge advantage in how to build up and manage your credit. This is because lenders want to see a variety of credit types on your credit report. There are 5 types of credit that you should be aware of: revolving credit, installment credit, secured credit, unsecured credit, and short-term credit.
When talking about revolving credit, you are talking about credit like credit cards where you can pay a varying amount every month. The reason it is called revolving credit is because you do not have to pay the entire amount that you owe. If you choose to not pay the full amount, the balance gets revolved to the next month though you should know that the delayed amount will be subject to additional interest charges. These will often have a minimum amount that you have to pay every month and there is a credit limit that you need to stick to.
Installment credit refers to accounts like mortgages, student loans, and car loans. With this type of credit, you are expected to pay a fixed amount of money over a specific and agreed period of time. You do have the option of paying it off entirely when you can, but you are not obligated to. The lender will give you a set payment schedule which includes the APR.
Secured credit is a type of credit where lenders have claim to your property if you are not able to pay back the loan. When you fail to make the agreed upon payments, they can put a lien on your property and take ownership of it in place of payment. For instance, if you keep missing car loans, they can repo your car.
With unsecured credit, you will not face a lien on your property if you do not pay it back so this has the least amount of risk as a borrower. Some types of this credit include medical and utility bills as well as credit card bills.
Short-Term Loan Credit
A short-term loan is something like a payday loan, where you get a short-term extension of credit that is an advance on your paycheck. These should be paid as soon as possible because they have such high interest rates and the payments can become significantly costlier.
There is no real trick to balancing the types of credit to optimize your chances of improving your credit score. Generally speaking, having a variety of revolving and installment accounts can be helpful. This is because it shows lenders that you are capable of making payments on time. Understanding this can be useful when it comes to repairing your credit and this is something that Advanced Credit Therapy can help you with. If you are looking for help to boost your credit score, Advanced Credit Therapy can really assist you in achieving a good credit score.