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Credit: Categories
  • Revolving credit
  • Non-revolving credit
  • Secured credit
  • Unsecured credit

Revolving credit is a specified amount of money—or a credit limit—available to a borrower for any number of purchases that may total no more than the limit. The amount and number of payments are based on how much credit the borrower uses; that is, how much the borrower spends. Picturing payments going in while funds are going out helps explain why this kind of credit is called “revolving.” Credit cards and store cards offer revolving credit. Such credit can remain open as long as the lender and borrower both wish to keep it open and the borrower makes proper payments.

Non-revolving credit is used to purchase a specific item such as a home or car. There is a specific dollar amount loaned and a set schedule of payments. When the payments are completed, both the principal and the interest on the amount borrowed will be paid off. After the final payment, the account is closed. Loans with such a payment system are sometimes called installment loans.

Secured credit exists when a lender has the legal right to take something (called collateral) from a borrower if the borrower fails to repay a loan. For example, a home mortgage is a type of secured credit because if the borrower fails to make monthly payments, the bank can foreclose on the house. An auto loan is another type of secured loan, since the lender has the option to repossess the car if the borrower doesn’t make payments.

Unsecured credit is issued without collateral. With unsecured credit, if a borrower fails to make payments or goes through bankruptcy, the lender can attempt to sue the borrower in court but doesn’t have the legal right to repossess anything the borrower owns. Unsecured credit is almost always in the form of a credit card or store card and almost always has higher interest rates than secured credit. Secured credit cards do exist, though they are far less common than unsecured credit cards.