It's important to have a solid credit history in order to get credit cards, be approved for loans or for a mortgage. However, before you can build credit, you have to understand it, namely the different kinds of credit that are out there and available to you. Once you know what's available, you can make an informed decision about when to open a new line of credit and when it might be better just to save up the cash to make a purchase.
Personal
A personal line of credit is rather open and can be used for a variety of things. It typically involves the borrower writing out checks that are supplied for goods that they'd like to purchase. These is usually a credit limit, but the funds that are used can be then repaid whenever you want, though interest will apply.
Term Loans
Term loans involve borrowing a certain amount of money and then paying it all back at once on a specific date. Any interest that accrues is also due on this date.
Charge and Credit Cards
Charge cards and credit cards are types of open-end credit accounts that allow you to apply additional purchases or request cash advances up to a predetermined amount. Charge cards are those that you obtain from a store like Sears, while credit cards come from the major credit card companies like Visa and MasterCard. Monthly payments are required to keep these cards in good standing.
Travel and Entertainment Accounts
Some financial service companies offer what are called travel and entertainment accounts, which allow you to charge specific purchases or services to a credit card that has to do with travel, lodging and entertainment expenses. These credit cards must have their balances paid off all at once within 30 days of use.
Home Equity Loans
A home equity loan is a loan against the value of your property, often made to perform remodeling or to pay for unexpected life expenses. These lines of credit typically have a low interest rate, making them easier to pay back than if you had gone to the bank for an entirely new loan.
Thirty-Day Accounts
Thirty-day accounts allow you to purchase an item and not pay for it until 30 days later, with no interest accrual.
Installment Credit
Installment credit encompasses loans that require monthly payments that include both principal and interest. Examples include loans for cars, computers and home appliances. You have to follow the repayment schedule exactly, however, as the purchased item might be repossessed if you miss a payment.
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