When you use credit, you are borrowing money with a
promise to repay at a later date. Credit is not free. It allows you
to buy things when you don't have cash, but you will be charged interest and
fees. There are three primary types of credit.
Installment
Credit This is credit that you use to borrow money and promise to
repay in equal amounts over a specific period of time.
Example
of an installment credit: Pedro signs an auto loan in which he pays the
lender $400 each month for five years.
Revolving Credit This is credit that
allows you to borrow a pre-established amount repeatedly as long as your account
is in good standing. You repay the amount borrowed in full or make a
partial payment that is subject to interest and/or
fees.
Example of revolving credit: Pedro signs up for a
credit card. He uses it to make purchases and at the end of each month, he
receives his bill. He can choose to pay off the balance in full or make
the monthly minimum payment.
Open Credit This type of credit
requires that all money borrowed must be repaid in full every
month.
Example of open credit: Pedro has a company
charge card he uses to pay all his business expenses. Each month, when he
receives the bill, he provides it to the company to pay off the entire balance
in full.
