About Different Types of Credit

Credit, in a modern sense, refers to the process of a lender or creditor giving a loan to a borrower. The concept is deceptively simple and its contemporary application involves interest rates, credit ratings and other arbitrary terms. Today, credit can be separated into several types, mostly depending on how the borrower is expected to pay back the loan.

History

Although credit as we think of it today refers to credit cards and bank dealings, the process of borrowing and lending currency has been around for centuries. Installment credit has existed in the United States since the time of the Pilgrims, when if one had a debt with a local merchant, he would pay it back as soon as possible in monthly or weekly payments.

Types

Many types of credit exist. Credit cards allow you to borrow money from the card issuing company. You can use the cards to purchase goods and services, or oftentimes for a cash advance. You can elect to repay the full amount owed each month, or just pay a portion and agree to interest charges on the remaining balance. Popular credit card types include Visa and Mastercard. Charge cards, such as the American Express card, are very similar to credit cards, however you must repay the total amount owed each month. Store credit cards are issued by department stores and other retailers. You can only purchase goods from a particular store or set of stores with each card. The interest rate for store cards is generally higher than other credit cards. Personal loans are another type of credit. These loans are usually for one big item, a car for example. They feature fixed monthly payments of a set amount to be paid over a particular period of time. Mortgage loans are used to purchase property. Like personal loans, they have fixed monthly payments. The interest is lower than other types of credit and the payment period is very long--often 15 or 30 years. Other types of credit include line-of-credit loans, overdraft bank account coverage, short-term pay day loans and others.

Features

Loans can be set up to be paid back in one lump sum by a specific due date or in several regular payments or installments. With loans, you normally are asked to sign a contract. With installment credit to purchase a car or appliances, you are oftentimes expected to make a down payment. You then agree to pay installments each month for a specified number of months. Finance and interest charges are included in the payments. When using credit cards, they can act as an interest-free loan until the end of the month. However if you don't pay in full, interest charges apply. Interest on credit cards and store charge cards is often 15 percent or more annually.

Benefits

Different types of credit allow people to have financial flexibility. Not many people have the money to pay for large purchases, such as a house, in full. By taking out a mortgage loan or car loan, you can provide a home and transportation for your family and pay back the lender over time. Credit cards and other types of credit can be important, particularly when unexpected expenses arise.

Warning

If you borrow money and are unable to make loan or credit card payments, you run the risk of getting lost in massive debt. When applying for credit, be sure that you have the means to make your payments in a timely manner. The effects of not paying on time are that the company will charge late payment penalties and report the late payment to credit agencies. If you have a history of late payments, it will be difficult to secure more credit in the future. According to the Federal Reserve, consumer credit as of May 2008 totaled $2.57 trillion, with revolving credit (primarily credit cards) making up $962 billion of that. When overwhelmed by debt, many people turn to bankruptcy. When using credit cards and taking out loans, be sure to manage your money wisely and make payments on time or early whenever possible.

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Which Credit Card Is Best for Me?

Picking the right credit card can be confusing because of the many options. Not only are there different cards from different banks but within many banks there is more than one credit card being offered with different features. Understand the options, and you can pick the card that best meets your needs.

Shop Multiple Cards

Consider card offerings from more than one financial institution. Don't rely on mailed-in offers. Be proactive and call several financial institutions to find out what is the best offer they have. Let the credit card company representative you are talking to know you are looking at several companies and want the best deal. The representatives have been trained to sell you the most profitable card for the credit card companies and will not necessarily offer you the lowest-rate card unless you ask for it.

Interest Rate

One of the key considerations is the interest rate the card is offering you. Although it may seem simple to compare rates, many rate structures are more complex. Some rates may be for an introductory period only. The rate on a balance transfer may be different from the rate calculated on a direct purchase using the card.

Other Hidden Charges

Familiarize yourself with other charges such as late payment fees, over limit fees and additional balance transfer charges. These less obvious charges can make the true interest rate you are paying on your card become much higher than you are aware of

Rewards

Many cards offer rewards. Consider each and determine which are important to you in terms of simple convenience and direct or indirect dollar savings. Cards can offer a direct cash back savings, discounts on purchases, accumulated frequent flyer mileage and a variety of gifts. Don't be swayed by gifts only in making your credit card decision because other factors such as interest rates over the long term are more important.

Transaction Reporting

If you will be using your card for business, reporting could be important. Some cards provide a year-end summary of purchases by category and in date sequence order. Others provide the ability to download your purchases into an accounting program or spreadsheet. This makes it easier for you to prepare tax returns or provide transaction data to your accountant. It also helps you make sure that you take all of the business tax deductions you are entitled to.

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5 Easy Types of Debt Relief Systems

Paying for a new home, car or a vacation may seem more like a wish than a goal if too much of your paycheck goes out to consumer debt. Debt elimination programs can work to your advantage and create some breathing room between your income and expenses. These programs also can get you out of debt years sooner and make the difference in thousands of dollars paid in interest.

Debt Management

A debt management company forms an agreement with the customer's creditors to lower interest rates and fees. The plan is explained to the client, who accepts or declines it. The debt management program starts with a single monthly payment made to the debt relief company. The company then makes a payment to the creditor. Creditors receive 100 percent of their money, so this has a positive impact on the client's credit score. The management company often provides support and resources to assist clients in managing their money so they're more likely to pay on schedule. Most companies have a minimum balance requirement, and the balance often needs to be with two or more creditors.

Unsecured Loan

The client applies for a personal loan from a lender, usually a bank or credit union, to pay off all his creditors to get a lower interest rate on the debt. The new deal will get the customer out of debt sooner with less money paid and provides for a single payment each month. An unsecured debt-elimination loan is usually capped at $25,000 for those with good credit.

Debt Settlement

With debt settlement, a client makes monthly deposits to a settlement deposit account in an amount she can afford. The client stops paying the creditors, and the settlement company negotiates with her creditors for a lower amount to repay. When settlements are reached with creditors, settlement payments are paid into an account the customer set up.

Credit Counseling

An agency will form an agreement with your creditors to lower interest and fees on your behalf. Once the client, settlement company and creditors reach an agreement on a payment plan, the plan goes into effect. The client pays the debt relief company, which then pays the creditor. Having the debt relief company there to manage the debt repayment gives creditors reassurance that they'll get their money each month.

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What Is Paid After a Foreclosure?

Foreclosure is a procedure a mortgage lender can use to recover your mortgage balance if you are unable to make your mortgage payment; however, lenders typically only foreclose as a last resort. This is because the costs of foreclosure average about $60,000 per home, according to Jonathan D. Epstein of "The Buffalo News." Several costs are paid after the foreclosure sale.

Mortgage Balance

After a foreclosed home is sold through an auction or a real estate agent or broker, the proceeds of the sale are used to pay for your mortgage balance. If money is left over, the lender will pay you the difference, minus other costs associated with initiating and completing the foreclosure.

Deficiency

A foreclosure sale may cover the balance of your mortgage if you had paid down a substantial portion of your balance before going into foreclosure. However, if you owe more on your home than the foreclosure sale price, the lender will hold you responsible for the difference, called a deficiency. You will have to pay the deficiency to the mortgage company to pay off the loan, even though you no longer own the home.

Foreclosure Costs

After a foreclosure, you may be responsible for the lender's costs associated with executing the foreclosure action. These costs may include attorney's fees, auction fees, Realtor commissions, appraisal costs and insurance on the home for the time between the foreclosure action and the sale. In some states, the mortgage lender must file a foreclosure action in court; if your lender executes judicial foreclosure, you will typically be responsible for court costs. Your lender may add these costs to your deficiency amount.

Considerations

If you do not pay a deficiency amount after foreclosure, the lender may sue you for the deficiency, depending on your state's laws. After obtaining a judgment for the deficiency, the lender may garnish funds in your bank account and liquidate your personal property. In most states, it may also garnish up to 25 percent of your wages to pay the deficiency amount.

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Is Bill Consolidation a Good Idea?

Most people start out with a desire to keep up with their bills and pay them on time. Unfortunately, life sometimes gets in the way of doing so, and it's all too easy to end up with debts that are difficult to pay. When this happens, some people seek out debt consolidation options in order to avoid simply defaulting on their bills.

Significance

Whether or not a bill consolidation program or loan will be good for you depends on a number of factors. All types of debt consolidation loans have both pros and cons that must be considered carefully in terms of your unique situation. According to MSN Money, for example, a person may take a home equity loan in order to consolidate his bills. This offers him the ability to pay one bill each month instead of several. In some cases, home equity loans may even offer lower interest rates in comparison to the total interest rate on multiple bills. However, if the person defaults on the loan, he risks losing his home (see Resources below).

Types

Among the many types of debt consolidation options are signature loans, credit card programs, debt consolidation mortgages, mortgage refinance loans, debt consolidation counseling and loans that borrow from a person's retirement fund. To determine which one might be best for you, you have to consider the interest rate you'll be paying and the overall amount you'll be paying over time. In some cases, the interest rate may be so high that you end up paying a dramatically different amount than you would have if you stuck with paying your bills individually. According to MSN Money, it may be better to make better payment arrangements with each creditor, in some cases, than to end up with a much more costly loan (see Resources below).

Considerations

As far as debt counseling is concerned, you may do well with a company that can develop a solid plan for getting you out of debt. Such counseling programs can help you to pay off your bills within 3 to 6 years. These programs may not only help you to work out a plan with your creditors, but they may also pay the bills for you, using your money. However, if they fail to pay your bills on time, you could rack up late fees and take a hit to your credit score. Additionally, credit counseling agency fees may just add to your expenses.

Prevention/Solution

According to Bankrate, it's always a good idea to check into the reputation of the company you're planning to deal with when you're seeking debt consolidation programs and loans (see Resources below). Check with the Better Business Bureau to find out whether or not the company has been accused of having abusive lending practices or misappropriating money provided for bills. No matter how good a bill consolidation program sounds, you'll want to skip it if there are blemishes on the company's record. Since there are so many companies that help with bill consolidation, you should have plenty of choices.

Warning

In deciding whether or not bill consolidation is a good idea, you always have to consider the risks. With debt consolidation loans that involve your home, consider the risk of foreclosure if you cannot meet your new loan payments. With loans from your retirement account, consider penalties you may be charged. According to SmartMoney, you may have to pay taxes and a 10-percent penalty for withdrawing money from your retirement fund early, at least in some cases (see Resources below).

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How to Fix Credit With Restoration to Reestablish Credit

Credit restoration can be an extended process that requires regular attention and disciplined behavior. Many individuals choose to work to repair their credit themselves while others enlist credit restoration services, debt consolidators, credit counselors, life coaches and therapists to assist them in their efforts to restore reestablish their credit. The core principles for restoring good credit are living within your means and paying off or settling existing debts as quickly as possible.

Instructions

1

Attempt to avoid bankruptcy by any means necessary. Bankruptcy remains on your credit report for ten years. You are required by law to report your bankruptcy whenever asked on documents like loan and job applications. All liquid assets are also seized and redistributed after a successful personal bankruptcy filing. The bankruptcy can be denied, wasting effort and legal fees.

2

Contact any creditors directly with which you have late or delinquent accounts. If you have a late account, ask them to remove the late payment entry from your credit report in return for a payment. If the account is delinquent, try to settle the debt. Begin negotiating at 10 percent of the total debt amount, but expect to pay 25 percent or more of the debt. Get any agreement to settle debts in writing from the creditor.

3

Make all debt payments on time after clearing up any delinquent or defaulted accounts. The majority of your credit score is made up of making payments when requested. Keep credit card balances as low as possible to maintain good credit. It may take years, but your credit will be reestablished if you demonstrate a sustained pattern of meeting your contractual obligations.

4

Pay all bills on time. Delinquent bills will not necessarily appear on your credit report, but if they go to collection, it will manifest and damage your score. Set up automated bill payment plans to ensure that you don't make mistakes when paying your bills.

5

Check your credit report regularly for errors. Common mistakes include confusing the credit entries of family members with similar names and mistaken dates. Dispute erroneous entries on your credit report with relevant credit bureaus and include copies of any documentation you may have supporting your claim.

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How Long Will Credit Repair Take to Increase My Credit Score?

Credit repair may immediately impact your credit score in a small way; however, drastic changes in your score will take time. The amount of time depends on the circumstances surrounding your low score. The more drastic the circumstances, such as bankruptcy or foreclosure, the longer they take to overcome. In the meantime, continuing to improve your score in small amounts through credit repair will help your cause.

Factors

The primary factor influencing the length of time it will take to improve your credit is the type of negative information on your report. If your score is low because you are carrying too much debt, you can immediately improve your score by paying off the debt. If your score is low because of missed payments, the negative information will disappear after seven years, depending on your state, but your credit can go up in the meantime if you pay your debts. If, however, the negative information on your report takes drastic debt counseling to fix, such as a bankruptcy or foreclosure, you will be facing a much longer road.

Regulation

Two types of regulations affect the length of time it takes to improve your credit. Regulations limit the statute of limitations on debts. After a given period of time, typically six to 10 years, depending on the debt and state, a lender no longer has a right to attempt to collect from you. If the debt has been handed to a collections agency, the agency does not have a right, either. Always verify the statute of limitations when a lender attempts to collect. If the debt is past the statute, immediately ask to have it removed from your credit score and tell the collector to stop contacting you. The second regulation affecting your improvement time frame is the statute of limitations for information on your report. This is generally between five to 10 years, and it varies state-by-state as well. Many states allow for bankruptcies to stay on a credit report longer than defaults or missed payments. Know your state's laws and contact the credit bureaus if a report is past the statute.

Solution

Take steps to remove incorrect information on your credit report. The Consumer Protection Agency and the Federal Trade Commission both offer solutions to predatory lending and misinformation. Notify your lenders and the credit bureaus in writing if you notice errors, and keep a copy of all communication for your records. If you feel an agency attempting to collect does not have the right to do so, you have the right to request verification of the debt and the agency's right to collect that debt. The agency must respond within 30 days or cease collection. These protections are on the books to help you repair your credit. Use them wisely, and you will be able to boost your score quickly.

Best Practices

While consolidation and settlement can adversely affect your score, a number of best practices in credit repair will improve your score. Time is the best remedy. While you wait, apply the best practices to help boost your recovery. First, pay down your existing debts. Pay down high interest rate debts first, and make all payments on schedule. Second, reduce the amount of credit and debt available to you to an appropriate level. For example, if you have six credit cards totaling a $20,000 limit but only earn $30,000 per year, your score may be suffering. Close high interest rate cards and those you do not often use. Aim for available credit between 10 and 20 percent of your income. Finally, take new debts only if they build your assets. For example, do not take debts to purchase clothing. Instead, take a car loan or a computer loan. Aim to build your net worth through borrowing.

Warning

When you enter credit repair, be sure to avoid taking steps that can adversely affect your score. For example, some credit repair companies advertise consolidation or debt settlement. If you close a loan early through one of these methods, the lender will may report negative information to the credit bureaus. You broke your contract by repaying the debt early. Only take these steps if your lenders agree to report your loans as satisfactorily closed. Further, avoid taking new loans to pay off old loans. This can keep your debt levels high, which will not help improve your credit score.

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