What Kinds of Credit are There?

There are several forms of credit you will want to know about and understand.

One is charge-account credit, the kind of credit you use to buy things at your local department or other retail stores and pay for at the end of the month when you are billed. Most businesses find this a convenience.

If your charge account is the 30-day type you pay up in full each month, there is no charge for this service – credit cards have worked like this in the past but things may be changing. However, since the extra record-keeping and billing cost the store a considerable amount, these costs are added to the price of the goods. Actually, then, every customer pays for this type of credit – even the ones who pay cash. This is one reason cash offers some negotiating room.

Another type of charge account is called revolving credit. Under this plan, a customer is allowed to make credit purchases up to an agreed limit. He agrees to make regular payments on that account of a specific amount each month, and he can make additional charge purchases at any time as long as his total credit does not exceed the agreed limit. Credit cards fall into this type of credit.

Under this revolving plan, the customer pays a service fee – usually 1% to 1-1/2 % per month on the amount owed.

Another form is installment sales credit. You may use this form of credit if you buy a car and pay for it “on time.” Many families also use installment sales credit to buy furniture and home appliances.

Here are a couple of points to keep in mind if you are planning to buy something – say, a car – through installment sales credit.

• 1. You will usually be asked to make a down payment. If you already have a car which you are trading in on another one, it may take the place of the required cash down payment.
• 2. When you buy your car on credit, you will be asked to sign a contract which is your promise to pay a certain amount each month for a certain number of months. Read this contract carefully and understand it before you sign it.
• 3. The total amount you agree to repay will include the price of the car, the service charge you must pay for the use of the credit, and probably the cost of the insurance necessary to protect the lender’s equity in the car.
• 4. If you have a conditional sales contract, you do not legally own the car until the final payment of your installment contract has been made. Still, you must make your payments even if you’re not satisfied with your purchase. You can’t just “let the car go back” and thereby cancel your obligation. If you do not make your payments and if the finance company does not feel that you are making a serious effort to make them, they may take the car back – repossess it. Then the finance company will re-sell it and apply the proceeds to the loan. If the sale of the car doesn’t bring enough to pay off the loan, you still owe the difference! You must pay back the money you borrowed, even if you didn’t spend it wisely.

Some families use credit to get a cash loan. Almost all families at some time or other find themselves facing an unexpected need for cash. Perhaps there has been a serious illness or the house needs repairs or the breadwinner has been temporarily laid off from his job.

Perhaps you have a “rainy day” fund to help you meet just such needs. But you may not want to dip into that fund right now. Think how desperate you would feel if you spent every cent of it and had nothing between you and an even more urgent need! You could, in some cases, borrow on your life insurance policy. But that’s pretty risky, too. That insurance represents future protection for your family, and you don’t want to whittle down their protection. Sometimes you can turn to relatives or friends for a cash loan. But some people are embarrassed to borrow from people they know.

In many cases, the safest and simplest way to get cash is to borrow it on a businesslike basis from a reliable credit source. Since consumer finance or small loan companies were created by special state laws to provide such cash loan services, they are the source to which many families turn for cash loans along with tapping their credit cards with cash advances or using the equity built up in their home by refinancing or a HELOC – Home Equity Line of Credit.

For such a loan, you agree to pay back the money you borrow in a series of monthly payments. Those payments include a charge for the credit service. Maximum charges are usually established by state law. Be sure you understand how much you are expected to pay in charges. The lender should give you a written statement of the terms of the transaction. If he doesn’t, ask for one, and look for a plaque on his wall showing membership in state and national associations. These associations demand strict adherence to a code of ethics and to high standards of business conduct.

How Much Credit can YOU afford?