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  • 29Sep

    What types of good and bad credits are there in the United States?

    Credit is the way of American life. People are heavily dependent on credits in order to meet all sorts of financial requirements. Basically, credit is a kind of advance money provided to people from lending institutions so they can make a cashless purchase. For that reason, various forms of credit or loans have been developed to cater to the public demand. However, due to mismanagement of these kinds of funds, many people fall into debt to a degree that compels them to look for other lines of credit, refinance loan, or other types of loans to repay the creditors.




    Barring those unfortunate events, people do apply for different types of credit based on their need and eligibility. These credits can be classified into two major types – good lines of credits and bad lines of credit.

    Types of good lines of credit

    These types of credit have minimal ill effects, until and unless handled poorly:

    SBA loans – These loans or credits are provided by the Small Business Administration to emerging entrepreneurs to fund their start-up venture. The SBA acts as the guarantor on behalf of the borrower, and, for this reason, SBA loans have a somewhat stringent approval process. Therefore, people who get easily agitated may find it very difficult to obtain an SBA loan.

    Professional loans – People hailing from different walks of life can obtain these loans. Professionals like medical practitioners, financial planners, lawyers, dentists and the likes can take advantage of these loans.

    Merger and Acquisition loans – Loans like these are provided for a more specific purpose. They are given to companies who want to expand their operations or are in talks to acquire other businesses.

    Credits and loans

    One of the most important precautions to consider while taking out credit is to verify the legitimacy of the creditor and his reputation in the local market

    The loans described above are quite beneficial for the borrowers, but they should remember that loans are meant to be repaid. There are some loans which engulf people in the vicious cycle of debt.  They are known to have disastrous effects on a borrower’s personal as well as financial life.

    Types of bad lines of credit

    Here are some of the bad lines of credit which people should avoid at all costs:

    Credit card advance – Credit card advances carry an APR (annual percentage rate) of about 25% or more. In addition to that, people have to pay a 3-5% extra fee on the total sum borrowed. It should be noted that taking a cash advance doesn’t offer a beneficial repayment deadline or grace period. In this regard, the interest rate is calculated from day 1 of the loan’s origination.

    Payday loans – Many people take out short-term loans of petty value on the basis of their paycheck. These loans are commonly known as payday loans. Though borrowers can get the loans very quickly and with fewer hassles, they come at a very steep rate of interest. Moreover, creditors start to collect the payments within weeks of lending the money.

    Title loans – Similar to the payday loans, title loans are backed by a borrower’s automobile. Due to the involvement of collateral, a good number of lenders don’t prefer to consider the borrower’s credit rating. However, this kind of loan is not advisable for people since they will be taking out the loan at a high rate of interest and transferring the title in the creditor’s name.

    One of the most important precautions to consider while taking out credit is to verify the legitimacy of the creditor and his reputation in the local market. Borrowers can check with the Better Business Bureau for this purpose by visiting their website.

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