The types of credit are revolving credit, instalment, open credit, trade credit, bank credit, mutual credit, service credit. Credit allows people to buy goods or services using loan money. The provider asks to receive the payment back with extra money which is called interest after a fixed allotted amount of time.
Revolving credit is one type of credit that comes with a capped limit and it can be used up till a person reach the predetermined amount. It may involve regular minimum payments, but usually, there is not a fixed repayment schedule. The example can be considered as a credit card as there is a credit card limit, that person can keep using it until they reach a fixed limit.
Installment loans are the type of credit that includes a fixed payment schedule for a specified time given. An example of an installment loan can be a car loan person required to pay a set amount of money at a defined interval till the loan is paid in full. Other examples can be include mortgages, student loans, and term loans.
Open credit is a type of credit that demands full payment for each period, such as per month. The person can avail up the maximum amount, same as to a credit card limit, but a person is required to pay the funds taken in full at the end of each period. An example can be a utility bill (like electricity usage in your household).
Trade Credit directly refers to the credit in business dealings such as selling goods on credit in which the applicant promise to pay money later, buying goods on credit acted as being the customer of supplier assure to pay to the supplier on a later date. It is offered based on the financial capability of the applicant i.e. credit taker. But in some cases, it is provided based on a relationship with the person needed for credit or it can depend upon the guidelines of the business. In a big organization, the guidelines for credit are the same for all the customers.
Bank Credit is an advancement of consumer credit. In bank credit, they provide loans and credit facilitates to clients. consumer credits are offered based on creditworthiness, analysis of financial statements, and value of the asset given by applicants as security. Example of bank credit is mortgage loans, cash credit facility, housing loans, etc. letter of credit, bank guarantee, discounting of bills of exchange are also considered under the bank credit facility.
In mutual credit, the money is not used as in this case if one person owns another person for something and that another person also owns the first one then the credit will be mutual. So credit gets canceled with each other and but if a balance remains after that the same is settled by the mode of cash or some other method. Such as in business one person is a creditor as well as a debtor. Hence, they mutually settle their payments.
In-service credit is the credit is assigned for services taken earlier. Such as lawyers needed final fees once the case is finished, the accountants charge after filing the returns, electricity bills, telephone bills, gas bills, and all post-paid bills are the best examples of service credit.
The service credit applicant is allowed to pay after taking the service at fixed intervals. But in case the applicant fails to pay at fixed intervals it may cause termination of services or charging of penalty for the late payments.
HOW DIFFERENT TYPES OF CREDIT AFFECT CREDIT SCORE
Each of these types of credit plays an important role in predicting your credit score. But there are two main credit scoring methods:
- FICO Score
The main method is FICO Score, which is calculated using the below five categories:
- Payment History
A history of making continuous payments, on-time payments build up the largest percentage in FICO Score. All three credit types installment, revolving, and open credit included in this category, so it’s mandatory to make sure the person pays at least the minimum amount due on time regularly for every loan, credit card, or charge card person has open.
- Amounts Owed
This category is not only concerned with how much a person owes its main goal is to look at how much a person owes as a percentage of their available credit, which is also known as credit utilization ratio (CUR).
- Length of Credit History
All three types of credit factors are included in this category. Installment loans close after they’re paid in full, but if the person had a credit or charge card for some time, it can help their credit score by keeping it open, even if you don’t use the card frequently. Closing it could lower the length of your credit history, which could adversely affect a person’s credit score.
- Credit Mix
A credit mix is a way of utilizing all three types of credit that pay off. It only makes up 10% of your FICO Score, but potential providers prefer to see that you can handle a variety of credit responsibly or not.
- New Credit
New credit is only 10% of your FICO Score, but loan providers prefer to see how much new credit is taking on, as it could act as an indicator that you’re not doing well financially. This category contains all three types of credit, so if the person is thinking of taking a car loan, opening a new credit card, and signing up for a charge card, they need to space them out so the person doesn’t need to have too much new credit too soon showing up on their credit reports.
As you progress through life, a person’s credit needs and the mix of credit types they maintain will change. But it’s mandatory to have some knowledge of the different types of credit, and how they affect or benefit their credit score, no matter whether the person is young or old or in between. Doing so will help people to get the most benefit from their credit at every stage of life.