Credit is a term that refers to the creation and accumulation of debt. There are different types, including consumer and business, secured and unsecured, and installment and revolving.
Loans that are paid in fixed amounts, for example, personal loans are considered installment credit. They are repaid in fixed amounts over a certain period of time. Other examples include student and auto loans and mortgages. Revolving credit gives access to funds up to a set amount. The borrower can draw on the line at any time up to the limit. Examples include HELOCs and credit cards.
Secured loans require that borrowers put a lien on an asset. This means that the customer offers collateral such as a vehicle, house or real estate, jewelry, or another valuable item. Home equity loans, mortgages, and car loans are examples. The major advantage is that financial institutions offer attractive interest rates because they take less risk. Secured loans also have longer terms of repayment because collateral is offered. The latter entitles the financial institution to take the asset in case the borrower defaults. Unsecured loans are another variety whereby collateral is not required. Utility and medical bills, credit cards, and unsecured student and auto loans are examples.
There are two other types – business and consumer. The latter is defined as services, products, and money offered in exchange of payment.
There are different types of cards such as airmiles, rewards, cashback, prepaid, secured, and no annual fee products. Airmiles cards are ideal for frequent travelers and persons who live and study abroad. Banks and financial companies offer rewards points that can be exchanged for travel, accommodation, and other perks. There are no blackout dates. Rewards cards are similar in that they offer bonus points. Some products come with a welcome bonus and complimentary perks such as insurance policies and generous discounts. Rewards cards are usually offered to applicants with high annual incomes and strong credit histories. Customers who prefer cash back can apply for a cashback card. This option is ideal for holders who pay their balance in full each month. There are different schemes, but customers usually receive between 0.5 and 2 percent cash back on purchases made in gas stations, pharmacies, and grocery stores. Another option is to apply for a gas card that offers gas rebates. This solution has become popular among customers, especially those who travel frequently. No annual fee and low interest cards are also offered to individual borrowers. Some products come with a zero or low interest rate during the first 6 or 12 months. It is called an introductory or teaser rate. Borrowers with multiple, high interest cards often transfer their balances to a low interest card. This product is also advertised as a balance transfer card. It is beneficial in that it helps borrowers to pay down their balances faster. Some banks also advertise car rental and other discounts and free supplementary cards. Customers with a compromised credit score usually apply for prepaid or secured cards.
The FICO score is based on different factors such as payment history, new loans, and types of credit. Other factors that play a role include recent searches, length of credit history, and utilization. Scores range from 300 to 850, and there are various types of FICO, including expansion, personal finance, and generic. All customers are entitled to a free copy of their report once a year. This is a beneficial tool because credit scores are considered reliable by financial institutions, landlords, and other parties.