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INTRODUCTION TO CREDIT

DIFFERENT TYPES OF CREDIT

Well, to put it simply, credit is any arrangement where you buy goods or services now but you agree to pay later. This section aims to provide you with an introduction to the different types of credit available and help you make sense of some of the jargon you'll come across.

Credit comes in many different shapes and sizes including mortgages, loans, overdrafts and credit cards. In most cases you'll have to pay an agreed amount back every month with interest. Whatever credit you choose, it's important to keep up with your monthly repayments. Now that you are familiar with what credit is, lets have a look at the different options.

What are loans?

A loan is where you borrow a certain amount for a certain period at a certain rate of interest. The most common types of loans are:

Unsecured loan

Also known as a personal loan, unsecured loans are typically used for big personal purchases, like buying a car. They are supported by your credit worthiness rather than backed by collateral, which means the lender is trusting you to pay it back without the need for security.

Secured loan

In addition to your credit worthiness secured loans are where your property or another asset (also known as collateral) is held as security. This means if you are unable to pay back the loan, the lender can take possession of your asset to help repay the loan.

Mortgage

If you are looking to buy a home or property, a mortgage is the type of loan you would normally consider. Mortgages are secured on the property, meaning that if you are unable to keep up with repayments you could lose your home.

What is an Overdraft?

An overdraft is a type of credit that lets you spend more money from your bank account than you have in it. Your bank or building society will usually charge you interest and other fees for using it, especially if you don't tell them beforehand (known as an unauthorised overdraft).

Credit and store cards

A credit card is issued by a credit card provider, like Capital One, and they are designed to pay for things in shops or online. You can also use credit cards for balance transfers and taking out cash (also known as cash advance or cash withdrawal) from an ATM.

Find out more about credit cards

Store cards are similar to credit cards, but usually you are restricted to using them in certain shops or stores.

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Credit Made Clearer provides general information about credit and does not provide financial advice. If you require financial advice about a specific issue you should consult an independent financial adviser.