Types of Credit

List of Top 8 Types of Credit

  1. Trade Credit
  2. Trade Credit
  3. Bank Credit
  4. Revolving Credit
  5. Open Credit
  6. Installment Credit
  7. Mutual Credit
  8. Service Credit

Credit is the arrangement where the borrower receives the money from the lender and in turn, agrees to pay the interest for the period during which money is held with borrower and promise to re-pay after a pre-determined time. Credit is of many types and some of the examples include mortgage loans, letter of credits, bank guarantee, consumer credit, trade credit, etc.

Types of Credit

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#1 – Trade Credit

Trade CreditTrade CreditThe term "trade credit" refers to credit provided by a supplier to a buyer of goods or services. This makes it is possible to buy goods or services from a supplier on credit rather than paying cash up front.read more refers to credit in business dealings like selling goods on credit where the customer promise to pay money later, buying goods on credit were we being the customer of supplier promise to pay to the supplier on a later date. It is given on the basis of the financial capability of the borrower i.e. credit taker. In some cases, it is given on the basis of a relationship with the person asking for credit or it depends upon the rules of business. In a large organization, the rules for credit is the same for all the customers.

#2 – Trade Credit

Consumer Credit refers to money, goods, or services provided on the agreement with the consumer to pay on the later date with the charges for using the credit. Consumer credit involves the hire purchase goods, personal loans, credit insurance, vehicle finance, etc. consumer credit is given on the basis credit-worthiness of the consumer, and rules of credit is the same for all the parties. consumer credit is specifically designed for consumers to give them various benefits. Purchasing goods on EMI is also an example of consumer credit. The overdraftOverdraftOverdraft is a banking facility that offers short-term credit to the account holders by allowing them to withdraw money from their savings or current account even if their account balance is or below zero. Its authorized limit differs from customer to customer.read more facility is given by the bank also falls under consumer credit.

#3 – Bank Credit

Bank Credit is an extension of consumer credit. In bank credit bank gives the loans and credit facilitates to clients. consumer credits are given on the basis of credit-worthiness, analysis of financial statements, and value of the asset given by consumers as security. The example of consumer credit is mortgage loans, cash credit facility, housing loans, etc. letter of credits, bank guarantee, discounting of bills of exchangeBills Of ExchangeBills of exchange are negotiable instruments that contain an order to pay a certain amount to a particular person within a stipulated period of time. The bill of exchange is issued by the creditor to the debtor when the debtor owes money for goods or services.read more also falls under the bank credit facility.

#4- Revolving Credit

Revolving creditRevolving CreditA revolving credit facility refers to a pre-approved loan facility provided by banks to their corporate clients. It states that the companies are free to borrow funds from these financial institutions to fulfill their cash flow needs by paying off the underlying commitment fees.read more involves the continuous credit in which lender gives the extension of credit to the borrower so long as the account is regular and open by regular payments like in case of credit card the credit is given on regular basis and limit of credit is given and payment to be done on monthly or quarterly basis. And account will continue till it is closed i.e. credit is extended every month.

#5 – Open Credit

Open Credit has a feature of both installment credit and revolving credit. in open credit limit is not set the credit card is given and then one will use it throughout the month and at the end of the month, the bill will be given to cardholder to re-pay and to continue the service. Electricity bills, gas bills, telephone bills, etc. are examples of open credit i.e. use first and then pay later and available for all.

#6 – Installment Credit

Installment credit is the extension of bank credit. when we obtain credit from banks by way of loan the bank sets the fixed monthly installment as repayment type of loan along with interest up to a certain period of time till the loan gets re-paid along with interest. Here bank or finance company charges the penalty if the borrower is unable to pay the installment.

#7 – Mutual Credit

In mutual credit, money is not used as in this case if one person owes another person for something and that another person also owes to the first one then the credit becomes the mutual credit. So credit gets cancel with each other and in case if a balance remains after that then the same is settled by the mode of cash or equivalent. Like in business one person is creditor as well as debtor. Hence, they mutually settle the payments.

#8 – Service Credit

In-service credit the credit is given for services availed earlier. Like lawyers ask for final fees once the case is over, the accountants charge after filing the returns, electricity bills, telephone bills, gas bills, and all post-paid bills are the examples of service credit. Service credit borrower is allowed to pay after availing the service at the fixed intervals. But if the service receiver fails to pay at fixed intervals it may result in cancellation of services or charging of penalty for the late payments.

Recommended Articles

This has been a guide to Types of Credit. Here we discuss its various types including trade credit, consumer credit, bank credit, revolving credit etc along with its detailed explanation. You may learn more about financing from the following articles –