Credit means you are using someone else’s money to pay for something. It also means that you are making a promise to repay the money. There are different types of credit and each has different payment options:
- Installment Credit (for example, houses, car loans) – With installment credit, you sign a contract to repay a fixed amount of credit in equal payments over a period of time.
- Revolving Credit (for example, bank credit cards, department store credit cards) – Revolving credit gives you the option of paying in full each month or making a minimum payment. As you pay the money back, it becomes available to borrow again.
- Open 30-Day Accounts (for example, travel and entertainment cards) – These accounts are required to be repaid in full each month.
You may use credit that is secured or unsecured.
means you have to provide something of value to guarantee that you will repay your debt. With secured debts, if you fall behind on payments, the lender can repossess the item of value that originally secured the debt. For example, a mortgage loan is a form of secured credit. If you do not repay the loan on time, the lender can take your home.
means you did not have to surrender anything of value to guarantee that you will repay the loan. Unsecured credit allows you to purchase items on credit in exchange for your promise to pay the creditor back. Examples of unsecured credit include credit card debt, medical debt, and personal loans.