The Basics of Credit
What to know before you borrow
most basic sense, credit means having the use of something before you
pay for it. This ability to borrow adds flexibility to planning and
makes it possible to pay for expensive items over a period of time.
There are many types of credit that you can choose from and each has
its own terms and purpose.
secured credit, an asset (called collateral) secures the loan. Because
of this security, the lender assumes minimal risk – if you miss a
certain number of payments, they can take the collateral. The lender
doesn’t have to go the expense and hassle of taking you to court and
winning a judgment before foreclosing on your home or repossessing your
There are two types of secured credit. It may either be a loan (closed-end) or a line of credit (open-end):
With secured, closed-end loans, the item you purchase is held as
collateral. The balance, including interest, is calculated into equal monthly installments
that you repay over a specific period of time. Common examples of
secured, closed-end credit include home, vehicle, and boat loans.
get a secured, closed-end loan?
It is usually the best, and often only, way to buy very
expensive items. Sure, it is possible to buy a car with a credit card –
but the interest rate would be far higher than what you could get if the
loan is secured by the purchase.
Secured, open-end credit is a type of revolving credit that is
secured by a cash deposit or an asset. These debts can be repaid in a
single, multiple, equal, or unequal payments. Examples of secured,
open-end credit include home equity lines of credit and secured credit
get a secured, open-end line of credit?
Interest rates for home equity lines of credit are typically low,
and you can usually deduct some of the interest from your income taxes.
Remember though, that these are secured loans – if you can’t meet the
payments, your home is in jeopardy. Secured credit cards allow you to
begin in the world of credit. All you need to do is put down a small
deposit as security and you can start charging – and building a positive
grant unsecured credit without requiring anything from you as security.
There is a considerable amount of risk on the lenders' part, because if
you fail to pay, they have to take legal action to recoup the money they
lent. This is why unsecured credit generally carries a higher interest
rate than secured credit. However, if you have proven yourself as a good
credit risk (by having a long history of borrowing and repaying money
responsibly) the interest rates can be attractive.
As with secured credit products, unsecured credit also comes in closed-end and open-end forms:
Loans requiring no collateral are types of unsecured, closed-end
credit. They are sometimes referred to as signature loans or personal
loans, and as with any loan, you are expected to repay it in equal,
get an unsecured, closed-end loan? They can be great for consolidating
debt or for purchasing an item that you want to repay over a specific
number of months or years. With a loan, you reduce your balance
gradually and steadily with each payment you make – as opposed to a
credit card where it is possible to maintain a never-ending balance.
Credit cards are unsecured, open-end credit instruments. The financial
institution sets such terms as your credit line, interest rate, and
grace period (the number of days you have to pay before finance charges
are added to the balance). You will receive monthly bills and the
minimum payment due is based on a percentage of your current balance and
sometimes the interest rate. If you spend more than your limit or pay
after the due date, you’ll be charged penalty fees. There are several
types of credit cards – general-purpose cards can be used virtually
anywhere while retail cards may only be used at particular retail
establishments, such as a department store or gas station.
get an unsecured, open-end line of credit? Credit cards are valuable
payment tools. If you use them regularly and stay out of debt, you may
qualify for "premium” cards, which come with higher credit limits and
enhanced customer service. Some credit cards offer points, rebates, or
cash-back rewards where the more you use them, the more benefits you
receive. When you use credit cards responsibly, you create an excellent
credit history which will help you finance expensive items like a home or
vehicle at the very best interest rates.
type you get, read and understand the terms of the loan or line of
credit before you sign and be sure to only borrow what you need and can
repay. It is incredibly easy to take on more debt than you can afford.
Whether the balance is secured or unsecured, the consequences for
falling behind are severe. However, if you borrow wisely, you can come
out ahead and achieve your financial goals quickly and affordably.