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If you’re thinking about borrowing money (maybe to travel or to move across country), you’re probably wondering what types of credit products are available. Credit falls into three main categories. Find out about each one below.
Installment loans are loans where you get a lump sum that you have to pay back within a certain term. Payments are made incrementally, usually monthly, until the debt is paid off.
Examples of installment loans are a mortgage, auto loan, and personal loan.
A mortgage and auto loan are obviously for a home and a car. Personal loans, on the other hand, can be used for a wide range of reasons. You can use them to consolidate other debt.
You can use them to pay for medical procedures or any other personal expense you have. (Although, some lenders may have rules on what you can and can’t do with the money. Paying for education costs is one thing in particular that may not be allowed.)
If you’re looking for a mortgage or other installment loan, the best thing you can do is shop around. Check with multiple lenders to see what they have to offer you. Installment loans may come with other fees like application or origination fees to watch out for. Multiple installment loans shopped for within a 45-day period to check rates can count as one credit inquiry, according to FICO.
Revolving credit is a credit line that you use and pay back. Credit cards are the most popular form of revolving credit. You apply for a card and the creditor gives you a credit limit. You can spend up to the credit limit, and the credit card issuer tells you what your minimum payment is each month in a statement.
Be careful not to fall into the minimum payment credit card trap. Interest rates on credit cards are usually variable, which means the rate can fluctuate based on a market index. Making the minimum payment and letting interest pile up can lead you down a debt rabbit hole.
Charge cards are cards that you have to pay off each month. American Express is an example of a credit card issuer that has several charge card products. With this card, you don’t have a card limit but you’re required to pay off the balance when the statement comes. It’s not like a credit card where you can revolve a balance and pay the minimum.
What’s right for you?
It all depends — there’s a good chance you’ll have at least one of each. Debt isn’t all bad if you use it wisely. When shopping for products, check your interest rates and read the fine print. Improving your credit can help you qualify for the very best rates on mortgages, credit cards, and other loans. Spend within your means to avoid getting into trouble with debt you can’t manage. Always think about how taking on another payment will impact your monthly budget.
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