The three main types of credit are revolving credit, installment, and open credit. Credit enables people to purchase goods or services using borrowed money. The lender expects to receive the payment back with extra money (called interest) after a certain amount of time.
A line of credit is one type of credit that comes with a capped limit and can be used up until you reach the predetermined threshold. It may include regular minimum payments, but usually, there is not a fixed repayment schedule. An example would be a credit card as there is a capped limit (the credit card limit), and you can keep using it until you reach such a limit (then over-limit fees apply). Another example would be a HELOC (Home Equity Line of Credit).
For more information on revolving credit, click here.
Installment loans are another type of credit that includes a fixed payment schedule for a specified duration. An example of an installment loan would be a car loan — you are required to pay a set amount of money at a recurring interval (ex. $280 per month) until the loan is paid off in full. Other examples include mortgages, student loans, and term loans.
Open credit is a type of credit that requires full payment for each period, such as per month. You can borrow up to a maximum amount, similar to a credit card limit, but you are required to pay the funds borrowed in full at the end of each period. An example of this would be a cellphone bill — you can make phone calls, send text messages, and use data each month, and at the end of the month, you are required to pay for the services you used (including any additional usage fees). Another example would be a utility bill (such as electricity usage in your household).
Determine which type of credit the following statements refer to.
Q1) Each month, you are required to pay $300 until the loan is paid off in full.
Q2) You are able to borrow up to $2,000 per month but must pay for all the funds borrowed each month.
Q3) You can borrow up to $1,500 per month, but you are only required to make a minimum payment (paying off the loan in full is not required).