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Types of Credit Available

There are a variety of different types of credit available to consumers to help meet their financial needs. These can range from a credit card for travel purposes or financing for automobile or other large purchases. Regardless of what form of consumer credit a person is considering, its beneficial to know the different forms of credit to make the best possible decision based on their individual needs through credit education. The following is a guide to the different types of credit available and some their varying aspects..

Installment Loans: are issued by lenders on the basis of credit worthiness with a fixed repayment schedule.

  • These are typically calculated with a simple interest rate and a fixed payment amount each month.
  • With a monthly payment schedule that is fixed, a certain amount is paid towards principle and a certain amount toward finance charges each month.
  • An installment loan may or may not have collateral attached. If collateral is held on the account and payments are not made as scheduled, the lender may reclaim the property held as collateral. If no collateral is held on the account and payments are not made the lender will have less recourse if payments are not made as scheduled. This could include legal action if deemed necessary.
  • Though installments loans generally have a grace period, fees are typically applied if payments are not made as scheduled.

Credit Cards: are issued by a variety of lenders. This can include your bank where you keep your checking and savings accounts, or a lender that solely deals with credit cards.

 

  • Credit cards allow consumers to make transactions based solely on credit.
  • The purchases made are added to the balance each month, along with any finance charges for that billing period.
  • Credit cards typically have a credit limit placed on them. This is determined by the consumer’s credit rating, the current economy and competition from other lenders.
  • The Annual Percentage Rate (APR) on a credit card is computed as compound interest, because of that, the amount of the monthly finance charges will fluctuate from month to month.
  • Monthly payments on these accounts will be variable as well depending upon the balance. Each month a different amount goes towards principle and interest.
  • Late payments on these types of account are generally penalized with a late fee that could be as much as $39.00 if the payment is made a day late.

Merchant Charge Cards: are extended by retailers for explicit use in their stores.

  • These accounts are typically treated the same as a credit card account in regards to credit limit, APR structures and payment requirements.

Lines of Credit: are extended by a variety of credit grantors.

  • A line of credit is simply an account held with a lending institution, maintaining a consistent credit limit that can be borrowed from as needed.
  • A line of credit will have an APR applied to the balance each month. The percentage rate would be fixed, however the amount of finance charges on the account would vary depending on the balance.
  • For example, a consumer may have a line of credit for home repair with a limit of $5,000.00 where they borrow periodically for repairs and then repay on a monthly payment schedule. The payment schedule will fluctuate each month, as will the amount of the finance charges.

Mortgages: are issued to assist consumers in purchasing a home. Unless you are an independently wealthy person, you will need a mortgage for the purchase price of a home. There are several types of mortgages available that a consumer may choose from.

 

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