Question

2.What type of credit would be appropriate if the individual paid their balance in full every month? What would be most important to this person when choosing a credit card?

Answer 1

There are three types of credit accounts: revolving, installment and open.

• One of the most common types of credit accounts, revolving credit is a line of credit that you can borrow from freely but that has a cap, known as a credit limit, on how much can be used at any given time. It typically refers to credit cards and home equity lines of credit (HELOCs). And it usually requires monthly payments and interest charges if you carry a balance.
• Installment credit refers to loan for a set amount of money with a fixed, regularly occurring repayment schedule. It includes a whole gamut of loans: student loans, mortgages, auto loans, personal loans, etc. This type of credit is also fairly common.
• Open credit is rarer, and many people won’t ever see it on their credit reports. Open credit refers to accounts that you can borrow from up to a maximum amount (like a credit card) but which must also be paid back in full each month. Open credit is generally associated with charge cards — not to be confused with the credit cards used for revolving credit.

There are hundreds of credit cards available, so shop around to get the one that suits you best.

Start by thinking about what you want to use the credit card for. This could be to buy things on line or on holiday, to pay your bills or to spread the cost of a purchase. However you choose to use your card, the key thing is whether you will be paying off what you owe every month or spreading repayments over a period.

If you can pay the balance off in full and on time each month, you can take advantage of the interest free period. In this case, the interest rate may not be so important but you may want to look at cards with other incentives like cash back. Even if you think you will be able to pay the balance in full each time, it’s worth planning what you’ll do if you can’t.

If you want to use the card for borrowing and you won’t be paying off the balance each month, you will usually have to pay interest. In this case, you may want to choose a card with a lower interest rate. Don’t forget to make sure you can afford a regular repayment.