Different Types of Credit And Why Variety Is The Spice Of Life
November 17, 2016
We’ve chatted a lot about credit, credit scores, and what determines your magic number – but what about the types of credit we have, and how those affect our score?
Different types of credit carry weight in different ways.
For example, paying a mortgage means that your amount owed decreases monthly, whereas paying a credit card is seen as a higher-risk loan by credit bureaus because the number can increase or decrease daily.
Having diversity within your credit rating is 10% of your overall score. In comparison to other factors, it’s not as high – but every percentage counts. So what types of credit are we talking about, you ask?
There are many types that credit report companies take into consideration:
- Car loans, mortgages, and home equity lines of credit
These are considered “secure” due to the fact that these loans are tied to something you own, and payments must be made on time and within the timeframe set in the repayment plan. Interest rates on secured loans tend to be lower because the lender can take something away from you if you don’t pay – the car or the house you’ve borrowed against.
- Credit cards, utility bills, medical expenses
These are considered “unsecure” because the only thing stating you will make these payments is your word. However (as you know), not paying them back is extremely detrimental to your score.
- Installment loans (ie. Student loans, personal loans, car loans, and mortgages)
These types of credit are referred to as installment loans because the amount owed must be returned through fixed payments over a certain amount of time.
- Revolving (ie. Home equity lines of credit, and credit cards)
Revolving loans have limits associated with them, meaning you can access the credit at any time, but all of these balances must be paid a minimum balance each month.
Okay, so you get it. Credit can be referred to as multiple things, and each of these things are in direct correlation with your magic number.
“But excuse me, Borrowell, how can this help me improve my credit score?”
If you don’t have accounts in multiple types of credit, don’t worry. It’s not necessarily recommended you open new accounts just to create diversity unless you are planning to use them. Generally, if you stay responsible with your money, your credit score will be sunshine and rainbows.
But, here are a couple of ways you can check off types of credit from your “increase my credit score” bucket list:
- If you’re not paying your credit card balance in full every month, consider getting a loan and using it to pay off your credit card. Not only will it help with your credit utilization (remember Week 3?) but the diversity of credit types will likely help improve your score. It’s another reason why refinancing your credit card debt with a loan makes good financial sense.
- If you do not have a credit card, you should. This is a very valuable tool when it comes to finances, and due to this type of credit being considered higher risk, when you are able to control spending and make payments consistently, you will be taken seriously as a loan applicant.
Take that 10% credit inquiries contribute to your score, and add another zero.
Get it? Give it 100% (we love dorky jokes).