Are you ready to build your credit? Perhaps you have encountered some challenges along the way. Do you want to learn to do it the right way?
Since you’re reading this, you’re at the right place. It does not matter if you are building your credit for the first time or if you are in the beginning of the rehabilitation stage. No matter what stage you’re at, Empowering the Possibilities is here to help you on your journey. While we have said it previously, it bears repeating: this is a journey not a destination. On this journey we need to focus on the basics in order to build our credit successfully.
Let’s begin with the basics of credit. We all are familiar with the term credit, but did you know that there are two types of credit? Perhaps you’re thinking, “Oh, of course, bad credit and good credit.” Well, in a general sense, yes, but to go deeper we need to look at credit the way the institutions and lenders look at credit. When we speak the same language they speak, we will be able to begin our credit transformation.
You may have heard the term line of credit. According to Investopedia, a line of credit is, “a flexible loan from a financial institution that consists of a defined amount of money that you can access as needed and repay either immediately or over time.” You can learn more about the basics of lines of credit through Investopedia here.
Dealing more specifically with credit types, the two types of credit we are referring to here is closed-end credit and open-end credit.The chart below gives a quick visual summary of their differences.
Closed-end credit is a traditional (one-time) loan that gives the borrower a certain amount of money for a specific reason. Usually the interest rate is fixed and the repayment amount remains the same for the duration of the loan.
The second type is Open-end credit, which is a loan that has revolving credit and a preset limit, like a credit card or a HELOC (Home equity line of credit). This type of credit allows you to borrow what you want and when you want it and, even when you pay it, you are allowed to borrow more in the future.
Credit cards are another source of open-end credit, which we will discuss in a later session.
Both type of loans can boost your credit score and both can also lower your credit score depending on the discipline, dedication and commitment that you have toward them. Remember these three components will forever be a part of your credit journey. They are your keys to financial freedom and success.
As a review, you can take a look at our recent post, Steps To Building Credit, which will outline four simple steps to get you on your successful journey to build credit for your future. Let’s keep building!