Different Kinds of Credit
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It's important to be aware of the different types of credit so that you can be sure that you match the right type of credit to your needs. There are three main types of credit:
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- Open-end Revolving credit
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Open-end, Revolving Credit
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The first type of credit is open-end revolving credit. This kind of credit comes in two types: secured and unsecured.
Open-end, Unsecured, Revolving Credit
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- This type of credit requires that you have a fixed credit limit and pay at least the minimum due on your outstanding account balance each month. The minimum payment will be a percentage of your card's total balance.
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- The interest rates associated with open-end credit can be quite high, especially if you have a poor credit history or you don't shop around for the best deal. Examples of this type of credit include bankcards like MasterCard and Visa and many retail store charge cards.
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Open-end, Secured, Revolving Credit
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This type of open-end credit requires you to secure your credit card purchases by keeping a certain amount of money in a saving account or by buying a certificate of deposit for a certain amount. Then, if you do not pay your account on time or if you go over your credit limit, the credit card company can tap those funds. Often, people with poor credit histories or no credit history at all must use a secured MasterCard or Visa card until they can qualify for one that is unsecured.
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Open-end, 30 Day Credit
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The second main type of credit is Open-end 30-day credit. This type of credit usually comes with a high credit limit, but you must pay your outstanding account balance in full each month.
The American Express card is the most common example of open-end, 30-day credit.
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Closed-end Credit
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Lastly, the third type of credit is closed-end credit. When you are approved for a mortgage, finance the purchase of a car, obtain a student loan, or some similar purchase, you are using closed-end credit.
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- This type of credit is also referred to as installment credit: you borrow a certain amount of money and you are responsible for repaying it over a fixed period of time by making a series of regular payments of a certain amount.
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- This type of credit may also be secured or unsecured.
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