Credit is an important part of your financial life, opening up your options for borrowing money. From credit cards to auto loans, understanding your choices for available credit, along with how different types of credit affect your financial health, can help you make informed decisions and responsibly manage your finances.

Whether you're just starting to build credit or looking to diversify your credit mix, this guide is for you. Keep reading.

Types of Credit

Credit comes in many forms, but most credit types fall into a few broad categories. Here are some of the most common options:

Revolving Credit

Revolving credit is a type of account, like a credit card, that lets you borrow up to a certain limit, repay and then borrow again. The credit limit is set by the credit card issuer based on factors like your credit score and income. Credit cards and home equity lines of credit are some of the most common examples of revolving credit accounts.

Installment Credit

Installment credit refers to loans that allow you to borrow a fixed amount of money and repay it in equal payments over time. Some common examples include mortgages, auto loans, home equity loans and personal loans. Installment accounts have a defined repayment schedule, with fixed payments due at regular intervals, like monthly payments for a car loan.

Service Credit

Service credit is credit that service providers might extend to consumers – for example, utility companies or cell phone carriers. Under this kind of arrangement, you use the service first and pay for it later. Timely payments on utility bills can help you build credit, while missed payments can negatively affect your credit score.

Secured Credit

Secured credit is backed by collateral, which serves as a guarantee that the lender can recover their money if you’re unable to pay. Common examples include secured credit cards, where you put down a cash deposit that sets your credit limit. Auto loans are another type, with the car itself acting as collateral, meaning the lender can repossess it if you can’t make payments. Mortgages, one of the most popular forms of secured credit, are backed by real estate, with the home itself serving as collateral. Finally, home equity lines of credit use the equity in your home as security, giving you access to funds for projects or unexpected expenses. These types of secured credit can come with lower interest rates because the lender has a way to recover losses – but it’s non-negotiable to keep up with payments since missing them could mean losing the asset you’re using as collateral.

It's important to note that if you’re thinking about a secured credit card, you might prefer an alternate, unsecured option like the Juzt Digital Credit Card, which offers the credit-building advantages of a secured card, but without your having to pay a security deposit.

Unsecured Credit

Unsecured credit does not require any collateral, which means it can be riskier for lenders and more expensive for borrowers. Just like secured credit, unsecured credit comes in many forms – unsecured personal loans and credit cards are two of the most common types of unsecured credit. These tend to have higher, often variable, interest rates compared to secured credit options since the borrower isn’t required to put up any collateral. However, when used responsibly, unsecured credit is an effective way for users to build their credit history – it not only shows responsible use of credit, but it also contributes to your overall credit mix.

Open-End Credit

Open-end credit, which you’ll also hear called revolving credit, lets you borrow and repay money over and over again, as long as you don’t go over your credit limit. Credit cards are an example of open credit accounts, because you can use and repay your balance within your limit throughout every payment period.

Closed-End Credit

Closed-end credit describes loans that have to be paid back by a specific date, with a fixed repayment schedule. Mortgages and car loans are closed-end credit options, where you repay in equal installments over time until you reach full payment.

Retail Credit

Retail credit comes in the form of store credit cards, which you can use only at a particular store or group of stores. Retail credit cards usually have higher interest rates, but they may also offer attractive rewards programs or discounts.

Bank Credit

Bank credit includes a wide range of financial products offered by banks – such as personal loans, lines of credit and mortgage loans. Bank credit can be either secured or unsecured, depending on the product.

Credit Cards

Credit cards are probably the most common type of revolving credit. They offer flexibility for everyday expenses and allow you to make purchases up to your credit limit. Keep in mind that carrying a balance and making only the minimum payment can lead to racking up big credit card bills and paying interest, which could cost you a lot over time.

Understanding Credit Lines and Limits

A line of credit is a flexible financial tool that lets you borrow up to a preset amount of money, which is known as your credit limit. This limit is determined by the lender, based on credit scoring factors like your creditworthiness, income and debt-to-income ratio. You can draw from this line whenever you need, whether it’s for emergencies, big purchases or daily expenses. Unlike a loan, which gives you a lump sum that you have to repay in installments, a line of credit gives you the option to use the funds whenever you need and pay back only what you use.

Here are the two main types of lines of credit:

  • Revolving credit: Credit cards are the most common type of revolving credit. With a revolving account, you can keep borrowing and repaying the available credit as long as you stay under your credit limit. Each time you make a payment, your available credit replenishes. That makes this type of credit highly flexible and lets you effectively manage unpredictable expenses.
  • Non-revolving credit: This type of credit works much like a revolving line of credit, but once you use and repay all the funds, your account closes, and you can’t borrow again without reapplying.

What Is a Credit Limit?

Your credit limit is the maximum amount you can borrow at any given time on a revolving credit account – like a credit card or a personal line of credit. This limit is set by your lender and varies based on factors like your credit score, income and existing debt. While it's tempting to spend up to your credit limit, that can negatively affect your credit score and overall financial health. If you’re looking to build or maintain good credit, it’s essential to keep a low credit utilization ratio.

Credit Scores and Reporting

Your credit score is a three-digit number that reflects your overall creditworthiness, while your credit report outlines a detailed history of your borrowing activity. FICO scores and other scoring models use factors like payment history, credit mix and the length of your credit history to calculate your score. Regularly reviewing your credit reports from the major credit bureaus –Equifax, Experian and TransUnion – can help you spot errors and dispute any inaccuracies that could bring down your credit score.

Specialized Types of Credit

Some types of credit cater to specific financial needs, and they usually come with unique terms and conditions. Here are some of the most common:

Mortgage Loans

A mortgage loan is a long-term loan used to buy property. It’s a form of secured credit, because it’s backed by the home itself. Mortgages usually come with lower interest rates compared to other loans, but it’s important to remember that failure to make on-time payments can lead to foreclosure.

Auto Loans

An auto loan is a type of installment loan you can use to finance purchasing a vehicle. These loans are secured by the car itself, meaning the lender can take back the vehicle if you miss payments.

Student Loans

Student loans are designed to help students pay for their educational expenses. These loans can come from either the federal government or private lenders, and they usually offer repayment options that can be tailored to your post-graduation income.

Personal Loans

A personal loan is an unsecured loan that can be used for many different purposes, from debt consolidation to home improvements. Personal loans commonly feature fixed payments and lower interest rates compared to credit cards. 

Business Credit

Business credit allows companies to borrow money to fund operations, hire staff or make strategic investments. For example, as a business owner, you might use a business line of credit to manage cash flow or secure funding for your company’s growth.

Microcredit

Microcredit is all about offering small loans to people, especially those with low incomes or limited access to traditional banks. These loans are designed to help people start or expand small businesses. This kind of lending is especially helpful in areas where traditional banks might be out of reach or unwilling to lend because the borrower doesn't have a strong credit history or collateral.

Microcredit loan amounts are often just a few hundred to a few thousand dollars – much smaller than what you’d see with traditional bank loans. The big difference with microcredit is that it focuses more on the borrower’s potential and business idea rather than their past financial record. That makes it a valuable resource for entrepreneurs, artisans and small-scale farmers who may not have access to other funding.

Peer-to-Peer Lending

Peer-to-peer lending is a newer way to borrow or lend money – instead of going through a financial institution, borrowers can connect directly with individual lenders through online platforms like LendingClub or Prosper. These platforms handle all the paperwork and match borrowers with lenders, often offering lower rates than you’d get through a bank.

Here’s how it works: if you need a loan, you submit a request through one of these platforms, explaining what you need the borrowed money for – whether it’s for debt consolidation, home improvements or something personal. Investors on the platform can then choose to fund all or part of your loan, earning interest in return.

Navigating the World of Credit

Understanding the different types of credit available to you – from installment loans to revolving credit accounts – is essential for responsibly managing your finances and achieving your financial goals. Maintaining a diverse credit mix, keeping your credit utilization low, and making timely payments will help build and improve your credit score over time. Remember, every credit application affects your financial profile, so open additional credit accounts judiciously to build a strong financial future.

This article provides general information and does not constitute financial advice. For guidance specific to your situation, consider consulting a financial advisor or credit counselor.