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Types of Credit

The types of credit available are many and varied. If you can get it without paying it back immediately, then it is credit. Credit is usually associated with money, but it doesn't have to be. However, we will concentrate on money in this article as that is where credit is most often found.

The credit card is probably the most obvious of the types of credit for most people. With a credit card you can spend all day without touching a single red cent. You have to pay it back again, of course, but even then it can be done at your leisure.  

With a credit card you don't have to pay back everything you've spent at the end of the month. You will have to pay back something though. The company will specify a minimum amount that you must pay, but that is usually very little compared to the amount spent.

Be careful – if you only pay back the minimum each month it can take a very long time to pay back even a fairly small sum. This is because of the interest charged. Because you have been given credit or free spending power in other words, they charge you heavily for the privilege. The longer it takes to pay back, the more you pay in interest.   

Another of the common types of credit is the bank overdraft. This form of credit has been around for a very long time. Basically, it means that you can draw out more money from the bank than you actually have in it.

Don't just do it though! Ask the bank first if you can. If they agree they will set up an overdraft facility with an agreed limit. Spending more than you have in the bank without asking first will only get you a very expensive bank charge. They don't like it.

Hire purchase is another quite common variation of the many types of credit. It is common among car buyers. In a way you are hiring the item while you purchase it. In the case of a car, you usually have to come up with a deposit, which can be around 25% to 35% of the total value. Then you pay off the rest, plus interest, at an agreed rate over an agreed time period.

You can simply get a loan, which is yet another of the types of credit available. There are basically two kinds of loan: a secured loan and an unsecured loan. A secured loan is one where you borrow money against something of value. If you fail to pay the agreed amount at the agreed rate you may lose the item of value that the loan was based on.

An unsecured loan is one where there is no security on the loan. The interest rates will be higher because of the greater risk to the lender. You need to be very sure that you can afford to repay this kind of loan.

Other types of credit include a mortgage, commonly used in house buying. It is a kind of secured loan over a long time period. The house is the security, which you can lose if you default on the monthly payments.

One very old credit type is pawnbroking. The pawnbroker will take your valuable item and give you some money for it. Usually a lot les than it is worth. You can redeem the item by repaying the pawnbroker whatever he gave you, plus interest. If you don't within a certain time period, he will sell off the item you pawned and you will lose it.

Credit in Minutes Tip #1

Stay on top of your credit report. Most credit reports contain errors. Make sure you check your credit report every year (you get one free credit report every twelve months) and if there are errors make sure to challenge them with the reporting credit agency. Credit agencies are required to investigate each and every challenge that gets reported.

Credit in Minutes Tip #2

Just because you qualify for all of those credit cards does not mean you should get them. A person with too many credit cards looks sketchy in the eyes of a potential creditor. Think of it this way: if a person is financially stable does he or she need ten different credit cards? Wouldn’t just one or two suffice?

Credit in Minutes Tip #3

The best way to raise your credit score is to make all of your payments on time. It sounds too simple to be true, but that’s all there really is to it. Staying out of debt and/or making all of your debt payments on time will keep your score up where it should be.

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