The buy-now-pay-later world of credit is tightly woven into the fabric of today's economy. Credit can be used to replace a broken appliance even when cash is low. It can buy a new car with a price sticker that would challenge the most dedicated saver. It can indulge a whim without regard for practicality, and it can be essential in starting or expanding a business. But credit is not one-type-fits-all. To know what type of credit you need--consumer credit, retail credit or cash credit--you must know what each type is and how it is used.
Consumer credit is a general term that describes loans--usually unsecured--extended to people. Unsecured credit is backed only by a promise to repay. There is no physical collateral that the credit issuer can claim if you fail to pay, or default. Credit cards generally fit into this category. Secured credit is backed by collateral. Consumer credit often is repaid on a monthly basis. Installment loans and personal loans are also referred to as consumer credit, but only if given for personal use. Consumer credit is not for business use.
Types of Consumer Credit
A home equity loan or credit line and home loan are the basic types of consumer credit. These loans are secured, that is backed, by the value of your home. Open-end credit, revolving credit and credit cards allow an individual to purchase items up to a certain limit and repay a minimum amount each month. Interest will be added each month to any balance that has not been repaid. You usually repay each of these loan types in monthly installments.
Retail credit is a type of consumer credit, but with a more specific purpose. A retail credit line generally is a credit card for use at one particular store. The store grants you special perks for using the credit card to make purchases. The credit card issuer often is one of the major credit card companies acting on behalf of the retailer, not the retailer itself. Much like any other credit card that offers rewards, specific purchase rules often apply. Some examples of purchasing rules are specific dates when you are allowed to use the credit card for discounted goods, a brief introductory discount followed by a smaller discount later, and blackout dates when rewards cannot be used.
Use of Retail Credit
Stores like J.C. Penny Co., Kohl's, eBay and Amazon are examples of businesses that use retail credit to promote consumer loyalty. Stores often offer you a large discount if you apply for the credit card more discounts later. By having its own credit card, the retailer avoids paying fees on other credit cards. One popular reward for signing up for store card is the offer of "no payments and no interest" for a specified time. While this might appeal to you, you should also take note that after the promotional period, a high interest rate might go into effect. Retail credit is usually for consumers, but businesses can also use these credit lines.
Cash credit is a secured credit line extended by a bank rather than a credit card company. Both consumers and businesses use cash credit. These credit lines can be accessed up to the predetermined amount by writing checks. Often, these types of loans are either cash advances for consumers or large loans to businesses.
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