Different Types Of Credit
Credit is a general term, covering a range of different loan and credit types, each with its own set of rules and characteristics. At National Debt Advisors (NDA) we give you some insight into the different types of credit of which you might already have accessed. Knowing what type of credit you have, you are able to understand what kinds of risks are involved should you neglect to stick to your repayments.
Secured credit is that which has assets connected as collateral. This means that the assets can be repossessed in the case of non-payment, to cover the costs of the debt.
- Bond – the home you are financing secures the credit.
- Car loan – the car forms collateral for the loan.
- Home equity loan – the real property value of your home secures the debt.
- Secured credit card – if you put an amount of money on your secured credit card, that amount is secured credit
- Line of credit – depending on the type of credit line, it may be secured by your home, the funds in your bank account, a certificate of deposit, or other assets.
This type of debt relies on your word, which promises repayment without putting anything on the line as collateral. Credit providers accept your word in good faith in the hope that you will repay the debt as agreed.
- Some bank loans
These are called signature loans. These loans often have higher interest rates due to the fact that you are not offering an asset as collateral.
- Most Mastercards and Visa cards
When approved, this type of credit asks that you pay in a monthly minimum towards your outstanding balance.
- Retail store and petrol cards
Repayment is monthly. The minimum must be paid each month.
Other types of credit
- Instalment, open-ended credit
Usually credit cards fall into this category. A fixed amount of credit is allocated and can be used however you may wish.
- Instalment, closed-ended credit
A fixed amount of credit is allocated for a specific purpose. For instance, a car or home loan. A specified amount must be paid back each month.
- Non-instalment credit
The credit comes with a high credit limit, however, the full amount of credit that is used must be paid back in full when the bill is received.