How to Choose the Type of Credit That You Need

| April 18, 2013
Type of Credit

Type of Credit

With so many different types of credit, it can be difficult to determine the one that you need. You will need to think about your current circumstances and the reasons for needing the money. Some people want to buy a house and will need a long term mortgage but others just want to bridge a gap between paychecks. Here are some steps to take to make your decision.

  • Why Do You Need the Money? What is the reason for opting for a line of credit? Do you want to buy a car or are you looking for a way to pay an emergency bill that you didn’t account for? This will affect the type of loan or credit agreement that you need. Those who want something to bridge a gap may find that a credit card or overdraft is the better option than a mortgage or unsecured loan.
  • How Much Can You Pay Back Each Month? It is possible to take out an overdraft and arrange smaller and more manageable payments. You will be able to change the amount that you pay and could even opt for a couple of months of not paying anything. There is not the strict agreement that other types of loans have. With unsecured and secured loans you will need to make a set payment every month. This is agreed on at the start of the term and there may be penalties if you choose to pay more off over the term.
  • How Long Do You Need It For? Credit cards and overdrafts are great for those who just want something for the short term. They may know that they will have the money over the next couple of months to clear the debt. However, if you want to buy a car, house or need a personal loan, you will need to start thinking about longer term options. Overdrafts and credit cards are not likely to cover three or four years – let alone 30! – and you will just end up paying large amounts afterwards.
  • How Much Money Do You Need to Borrow? This is a direct affect on the type of loan that you take out. If you need to borrow a small amount – up to about $1000 – you could opt for a credit card or overdraft (as long as you have that amount available. This will take less time to pay back and, depending on your paycheck, could be cleared within a month or two. However, when you want to borrow large sums, it is likely that you need longer to pay it back and you need to look at the unsecured loans. Those looking for anything over $10,000 will usually need to consider a mortgage.

Take your time to think about your circumstances and the reason why you need the money. This will help you choose between your options and make sure you gain a loan or credit agreement that works for you. Once you get it, stay on top of the payments to help your credit rating.

Author bio:

Myke Thomas is a software developer working for a renowned Information Technology outsourcing company. His current project revolves around creating financial asset management systems that would be used by various institutions.

How to Choose the Type of Credit That You Need

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