Three main types of credit:

 Revolving credit
 Installment
 Open credit
Revolving Credit

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).

 Revolving credit is a line of credit that remains open even as you make payments.
 You can access money up to a preset amount, known as the credit limit.
 When you pay down a balance on the revolving credit, that money is once again available for use,
minus the interest charges and any fees.
 You will pay interest on any balance carried over.
 Revolving lines of credit can be secured or unsecured.

Advantages:

Flexibility: Revolving credit provides you with flexibility in terms of borrowing and repayment. You can borrow
money as and when you need it, up to your credit limit, and repay it at your convenience.

Convenience: With revolving credit, you don't need to reapply for a new loan each time you need to borrow
money. The credit line remains open, and you can access it whenever you need to.

Lower interest rates: Revolving credit typically comes with lower interest rates than other types of credit,
such as personal loans or credit cards. This is because you only pay interest on the amount of money you
borrow.
Credit building: Consistently paying off your revolving credit balance can help build your credit score, which
can make it easier for you to obtain credit in the future.

Disadvantages:

High fees: Revolving credit may come with high fees, such as annual fees or transaction fees. These fees can
add up quickly and increase the overall cost of borrowing.

Temptation to overspend: The ease of access to revolving credit can be a double-edged sword. It can be
tempting to overspend, which can lead to high debt balances and difficulty repaying the debt.

Variable interest rates: Unlike fixed-rate loans, revolving credit often comes with variable interest rates that
can fluctuate over time. This can make it difficult to plan for the cost of borrowing.

Risk of default: If you fail to make your minimum payments on time, you risk defaulting on your revolving
credit, which can negatively impact your credit score and lead to legal action by the lender.

Installment

Installment credit refers to a type of loan or credit that is repaid in regular, fixed payments over a
specific period of time. This is different from revolving credit, such as credit cards, where the borrower can
borrow up to a certain limit and make payments based on the amount borrowed each month.

Common examples of installment credit

 auto loans

 mortgages

 personal loans

 student loans

Advantages of Installment Credit:

Predictable Payments: Installment credit allows borrowers to know exactly how much they will be required to
pay each month. This makes it easier to budget and plan for other expenses.

Builds Credit History: Timely payments on an installment credit account can help establish a positive credit
history, which can lead to better credit scores and lower interest rates on future loans.
Fixed Interest Rates: Installment loans often come with fixed interest rates, which means that the interest
rate will remain the same throughout the life of the loan. This makes it easier to plan for and manage
payments.

Large Amounts: Installment loans can be used to borrow large sums of money that may not be available
through other types of credit.

Disadvantages of Installment Credit:

Higher Interest Rates: Depending on the borrower's credit score and financial history, installment loans may
come with higher interest rates than other types of credit.

Fees and Penalties: Some installment loans may come with fees and penalties for late payments,
prepayments, or other reasons.

Collateral: Some installment loans may require collateral, such as a car or house, which can be seized if the
borrower defaults on the loan.

Long-Term Debt: Installment loans can result in long-term debt that may take years to pay off, which can limit
a borrower's financial flexibility.

Open Credit

Open credit refers to a type of credit that does not have a fixed repayment term or a set credit limit. It
is a type of credit account that allows the borrower to use funds up to a certain limit, and the borrower is only
required to make payments on the outstanding balance each month.

Advantages:

Flexibility: Open credit provides the borrower with the flexibility to use the funds as needed, without having
to apply for a new loan or credit account each time.

No fixed repayment term: The borrower can pay off the outstanding balance at their own pace, as long as
they make the minimum required payments each month.

Can improve credit score: If the borrower makes timely payments on the outstanding balance, it can help to
improve their credit score.

Can provide a safety net: Open credit can provide a safety net for unexpected expenses, such as medical bills
or car repairs.
Disadvantages:

High interest rates: Open credit accounts often come with higher interest rates than other types of credit
accounts, such as personal loans or credit cards.

Temptation to overspend: The flexibility of open credit can lead some borrowers to overspend and
accumulate more debt than they can manage.

Fees: Some open credit accounts may have annual fees or other fees associated with them.

Can negatively impact credit score: If the borrower misses payments or carries a high balance on the open
credit account, it can negatively impact their credit score