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How people use credit

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How people use credit
How people use credit

Lenders are known to analyze your credit behavior and put you into categories. This notion comes from the fact that there are a few broad ways, in which most of us use credit. Here is a list of few behavioral types.

Transactors: This is the type of credit usage that most people intend to do. The idea is that companies give an incentive to use their services. Instead of transacting in cash, if one uses credit, they are able to make money on the interest earned in the interest-free periods as well as the gifts and freebies that are on offer. However, this plan goes wrong when people forget to stick to the budget. Impulsive spending soon means that you are spending beyond your means and that paying in full becomes more and more difficult.

Revolvers: This is the kind of people that use credit to fill their monthly gap. To them, solvency is not an issue. They are sure that they can pay the loan. However, it is the timing of the cash flow that is difficult for them to manage. Thus, they tend to fall into a cycle of keeping balances or missing payments, all of which affects their credit score.

Pretenders: The last category is pretenders. These are usually people who have just started using credit. Many of them think about the cards as a free tool. They think these as freebies on offer. They have no plans of repayments and have no clue what their financial state is.

Expensive Credit Cards: These are useful in tough times caused by unemployment or another financial failure. People with a bad credit history or none have to pay 30% to 40% more in interest charges.
Expensive Personal Loans: If you are planning to start your business or remodel your house, you may need a personal loan. That again will be expensive.

Not maintaining credit will shut you out from the mainstream financial system. The lenders need positive information about your financial behavior to make you loans on good terms. Since most people cannot get by without taking loans, ensuring a good score and favorable terms is not such a bad idea.

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