Types of credit

There are several different types of credit which are classified under two broad headings – secured credit and unsecured credit.

There are several different types of credit which are classified under two broad headings – secured credit and unsecured credit.

Secured credit agreements have assets attached as collateral, which can be repossessed if you default on payments. Credit providers can then sell the assets to cover the costs of the debt. Assets include items such as houses, cars, furniture, etc.

With unsecured credit, the lender accepts your word in good faith with the hope that you will repay the debt as agreed. To help their decisions, lenders are able to request credit reports on applicants from the various credit bureaus.

Secured Credit Includes:

Mortgage bond or home loan: To buy or build a home most people take out a home loan or mortgage bond. This is a long-term agreement between you and the bank or another credit provider, where the loan plus interest is repaid over a long period – usually 20 or 30 years.

The bond is legally registered over your property and if you are unable to repay the loan, the property is the bank’s security. The interest charged on the loan can be fixed for several years or can be linked to the bank’s prime interest rates. In this case, your monthly repayments will increase if interest rates go up.

Hire-purchase (HP) agreements: These are used to buy vehicles, furniture or appliances over varying loan periods, from six months to five years. The seller arranges finance for you from banks that specialise in this type of loan. You will usually need to put down a deposit and sign an agreement where the loan is registered over the items that you buy.

Unsecured Credit Includes:

Credit cards: If you have a good credit history and a regular income, you could qualify for a credit card from a bank. You can use your credit card to buy goods and services in most places. The bank will set a limit based on your circumstances and your credit record, and you will be required to pay a minimum amount towards your outstanding balance each month.

Bank overdrafts: You can arrange a bank overdraft on your cheque account – usually the account your salary or other income is paid into. The bank will allow your cheque account to be overdrawn up to a set limit, but the interest rate on the overdrawn balance is often very high.

Retail credit cards: Store credit cards can only be used in a specific shop or group of shops. They may enable you to earn discounts or rewards, such as loyalty points or cash back for purchases. Repayment is monthly, and the stipulated minimum amount must be paid each month.

Whichever credit facility you decide on, the important thing is to use credit responsibly and know where you stand with your credit accounts. Compuscan’s https://www.mycreditcheck.co.za offers free full credit reports, where you can find your account payment history, balance and installments to help you manage your finances effectively.