Now that you know why credit is useful, and you have an idea what interest will cost you, it's time to look at various kinds of credit you might use in your lifetime. As you decide what kinds of credit to use, always keep in mind why credit is useful and that there are costs associated with using credit.
- Credit cards
- Store cards
- Auto loans
- Student loans
- Personal loans
Credit cards represent an agreement between the person using the card and the company or bank that issued the card. Each time a person makes a purchase with a credit card, that person is taking out a loan from the card issuer. The cost of the loan—the interest charged—and all of the repayment details are part of the agreement the card user signs when the credit card account is opened.
Store cards are like credit cards but only work at one particular store. Many department stores, clothing stores, and gas stations issue store cards. Store cards often have much higher interest rates than regular credit cards, so you should be very careful when using this type of credit.
Auto loans are a type of credit issued by a bank or other financial company for the purpose of buying a car. You’ll usually find better interest rates on auto loans from your bank or credit union than from the car dealerships.
Mortgages are loans made by banks or mortgage companies for the purchase of property. The property could be, for example, a house to live in, rental property used to generate income, recreational land in the country, or a lot on which you plan to develop a business. There are many types of mortgages, and figuring out which one is right for the type of property you’re going to buy could be a whole course on its own!
Student loans are loans made to students or their parents to finance the cost of tuition and other expenses associated with going to college or technical school. There are several types of student loans, but the most basic types are either government sponsored loans, such as the Stafford and PLUS programs, or private loans. Government sponsored loans generally have much better loan terms, including better interest rates and more flexible repayment options. Check out www.finaid.org/loans/ for great helpful information about student loans. Student loans are governed by special rules and laws; for instance, student loans can’t be discharged in bankruptcy filings.
Personal loans are loans between two people without the involvement of banks. Personal loans can be a great resource if they’re available, but they can also strain the relationship between the borrower and lender. It’s usually a good idea to put the loan terms of a personal loan in writing so that both people know exactly what to expect. Loan terms include information such as the interest rate charged; the frequency, number, and amount of payments; and when payments are due.