Households routinely encounter six kinds of credit: credit cards, personal loans, auto loans, student loans, mortgages, and home-equity credit. Each has a distinct structure, cost profile, and place in a household's balance sheet. Confusion among them is the source of most credit-related regret.
- 01List the six household credit products and their standard structures.
- 02Match a credit product to the purchase it is well-suited to.
- 03Identify the credit products a household should categorically avoid.
Revolving credit
Credit cards and home-equity lines of credit are revolving — a credit limit, a balance, a minimum monthly payment, and no fixed term. The flexibility is the feature and the trap; revolving credit is where households accumulate the highest-rate debt in their lives.
Installment credit
Personal loans, auto loans, student loans, and mortgages are installment — a fixed principal, a fixed schedule, and a fixed end date. The structure is honest and easy to plan against. Most household credit that is well-used is installment.
What to avoid
Payday loans, title loans, and buy-now-pay-later products with retroactive interest. These are engineered to extract from households that have no alternatives, and they compound faster than any legitimate credit product. A household in financial trouble should consider bankruptcy before payday loans.
- Revolving is where the highest-rate debt lives.
- Installment is honest and plannable.
- Payday, title, and predatory BNPL are engineered against you.