Types of credit
There are several different types of credit you may encounter if you need to borrow money, make a large purchase, or obtain a service.
Secured vs. unsecured credit
Some credit is secured by collateral. Mortgages and car loans are examples of secured credit. If you don't make your payments, your lender can seize your home or vehicle to recoup its losses. Sometimes, people build credit by opening a secured credit card, where you put down a security deposit that becomes your line of credit. Home equity loans and home equity lines of credit (HELOCs) are both forms of secured credit, with your home serving as collateral.
Unsecured credit is borrowed money that isn't backed by collateral. Lenders base approval for this type of credit on factors like your income, credit history, and other factors that help them gauge your likelihood of repaying. Most personal loans and credit cards fall into this category.
Revolving credit vs. installment credit
Revolving credit is a line of credit that you open and charge up as needed. You'll have a credit limit, which is the maximum amount you can borrow, but you don't need to make charges up to the limit. Usually, the interest rates are variable, meaning they'll fluctuate based on market conditions. You can typically pay off the full balance each month, or you can opt to pay just a small percentage of the balance. Examples of revolving credit include credit cards and HELOCs.
Installment credit is a lump sum of money that you borrow and pay back in fixed monthly payments, typically at a fixed interest rate. Mortgages, car loans, personal loans, and BNPL are all types of installment credit.
