Credit - Secured Vs Unsecured
One of the most widely misunderstood topics in personal finance is the different forms credit takes.
This lack of understanding is a reason why so many people fall into - and never get out of debt.
Please understand that not all types of credit are the same, and in order to become a more informed user of credit, you should familiarize yourself with the four main forms of credit.
Secured credit.
Loans are secured by a lien that the creditor places on the asset in question.
A lien is simply a legal right to take the asset if the loan is not paid back according to the specified terms.
A mortgage is the most common secured loan: if you don't pay your mortgage, the lending agency has the right to take your house.
Unsecured credit.
Unlike secured credit, unsecured credit is only backed by your promise, and does not place a specific asset in jeopardy.
The most popular forms of unsecured credit are credit cards, though medical bills are also a widely used form.
Revolving credit.
In this type, a creditor approves you for a specific amount, which you can use at any time.
In exchange, you agree to pay the minimum amount agreed upon each month for as long as the credit is issued.
This type of credit is where people get into trouble: they charge $10,000 on their credit card and only pay the minimum amount each month.
All the while, however, that balance is growing at a high interest rate.
Installment credit.
You borrow a specified amount of money upfront and agree to pay the loan off in installments over a fixed period of time.
A fixed mortgage is an example of installment credit, and is a great option for financial stalwarts.
If you like knowing what your bill will be every month, installment payment plans are the way to go.
These four forms of credit all have their place, and you should analyze which ones are right for you, based upon on your personality, spending habits and income.
The one most people should avoid outright is revolving credit, as it allows your debt to grow faster than your ability to repay it.
Of course, if you are responsible about paying your bills on time, then revolving credit can be a great way to build your credit history and help you get lower interest rates on other loans.
This lack of understanding is a reason why so many people fall into - and never get out of debt.
Please understand that not all types of credit are the same, and in order to become a more informed user of credit, you should familiarize yourself with the four main forms of credit.
Secured credit.
Loans are secured by a lien that the creditor places on the asset in question.
A lien is simply a legal right to take the asset if the loan is not paid back according to the specified terms.
A mortgage is the most common secured loan: if you don't pay your mortgage, the lending agency has the right to take your house.
Unsecured credit.
Unlike secured credit, unsecured credit is only backed by your promise, and does not place a specific asset in jeopardy.
The most popular forms of unsecured credit are credit cards, though medical bills are also a widely used form.
Revolving credit.
In this type, a creditor approves you for a specific amount, which you can use at any time.
In exchange, you agree to pay the minimum amount agreed upon each month for as long as the credit is issued.
This type of credit is where people get into trouble: they charge $10,000 on their credit card and only pay the minimum amount each month.
All the while, however, that balance is growing at a high interest rate.
Installment credit.
You borrow a specified amount of money upfront and agree to pay the loan off in installments over a fixed period of time.
A fixed mortgage is an example of installment credit, and is a great option for financial stalwarts.
If you like knowing what your bill will be every month, installment payment plans are the way to go.
These four forms of credit all have their place, and you should analyze which ones are right for you, based upon on your personality, spending habits and income.
The one most people should avoid outright is revolving credit, as it allows your debt to grow faster than your ability to repay it.
Of course, if you are responsible about paying your bills on time, then revolving credit can be a great way to build your credit history and help you get lower interest rates on other loans.
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