What Is Credit And Why Do You Need It?

What is credit?

four type of credit

• Revolving credit – This is one of the most common types of credit. With revolving credit, you are given a maximum credit limit (for example, $5,000), and you can make purchases/charges up to that limit at any given time. Credit cards and home equity lines of credit are popular forms of revolving credit. They usually require minimum monthly payments and accrue interest if you carry a balance from month to month.
• Installment credit – This is another popular form of credit. Installment credit generally refers to a loan for a set amount of money with a fixed, recurring payment schedule. An example of this would be, you borrow $15,000 to purchase a new car and you have a term of 48 months to pay the balance off. There are numerous types of installment loans, including student loans, mortgages, auto loans, personal loans, and more.
• Open credit – This is a somewhat rare type of credit. A person can borrow up to a maximum amount (like a credit card), but it must be paid back in full each month. An example of open credit is a charge card, which is not the same thing as a credit card.
• Service credit – Most people use a form of service credit every day, from heat, electricity, phone, and similar services. Service credit is often one of the first forms of credit acquired by a person starting out on their own. Since this of credit is typically one of the first forms of credit utilized by a person, it’s important to stay on top of payments in the early years to establish a solid credit history.