How Having Different Types of Credit Will Increase Your Credit Score
A lot of factors go into determining your credit score, the three-digit numerical rating that measures your creditworthiness to lenders. Here are the factors that affect your FICO credit score in a nutshell:
- 35 percent is based on payment history.
- 30 percent is based on accounts you owe money on.
- 15 percent is based on the length of your credit history.
- 10 percent is based on the new credit you’ve recently opened.
- 10 percent is based on the different types of credit you might have open at any given time.
While that last factor might seem like a small percentage, it plays a bigger role than you might imagine. The truth is, the right blend of credit can actually help increase your credit score. Finding this ideal mix of credit, however, depends on your financial scenario. For this week’s Credit Score Challenge, find out how you can boost your credit with different types of credit.
Credit Score Challenge Week 8: Use Different Types of Credit
There are several different types of credit — defined first as revolving or installment, according to CreditReport.com — that credit bureaus will likely analyze when configuring your credit score:
1. Revolving Credit
Credit cards are the most common forms of revolving debt. You’re allowed to borrow money within the credit limit on your card. And, you’re obligated to pay back a portion of your balance at the end of the statement period, which can vary from month to month depending on how much you’ve spent. This revolving, or rotating, process keeps your credit activity always current.
Read: 5 Surprising Things You Could Find on Your Credit Report
2. Installment Credit
These credit agreements have a fixed payment for a certain amount of time. You borrow a sum of money and keep making payments to the lender until your debt is paid off. Student and home equity loans are examples of installment credit, as are mortgages and auto loans.
3. Secured Credit
A secured credit card, a mortgage or an auto loan are all examples of secured loans. In each case, some form of collateral is required. The lender holds this collateral as a lien against the loan. If you fail to pay off what you owe, you can lose the car or house you’re financing.
Secured credit cards are often the main go-tos for people with no credit or bad credit, since carriers want some sort of financial incentive before granting you an account.
4. Unsecured Credit
Unlike secured credit, unsecured credit requires no collateral or payment in advance. A standard credit card with a high credit limit is a good example of unsecured credit. The lender is basing its decision to let you borrow money off your good credit standing and your word that you’ll pay the debt back.
5. Open Credit
According to Credit Karma, open credit accounts include company charge cards, cell phone accounts and home utilities. Balances are normally paid in full each month, and there’s no interest, so they don’t usually appear on a credit report unless payments are late or delinquent.
Related: The Biggest Credit Score Myth That Just Won’t Die
Finding the Right Credit Mix to Increase Your Credit Score
Several active forms of credit — without relying too much on one type alone — is highly desirable. Generally, most people should aim for some revolving and installment credit, since it shows borrowers are capable of balancing multiple accounts.
If you qualify for an affordable interest rate, look into getting one or two credit cards. According to FICO, having credit cards and installment loans can help you rebuild your credit. “Someone with no credit cards,” advises FICO, “… tends to be higher risk than someone who has managed credit cards responsibly.”
But perhaps you have enough credit cards and need to add installment loans into the mix. If that’s the case, LifeHacker suggests getting a savings- or CD-secured loan as one way to increase your credit score. These loans use the money in your account as collateral, and they count as installment loans.
Maybe you have no credit or your score has taken a hit. Applying for a secured credit card is a bona fide way of building a credit history and helping your credit score climb. After you’ve reached this goal, you should be able to move past secured debt and on to other, varied types of unsecured debt, giving you the freedom to juggle a few accounts at once.
To increase your credit score, obviously the most important thing is that you’re timely and not delinquent with the credit you have open. By making payments on time and having the right credit mix, you’ll see your credit score improve.
Diversify Credit — But Do It Carefully
By no means should you run out and open as many different types of credit as you can, though. Applying for numerous unnecessary credit cards will result in several hard credit inquiries that can cause your credit score to drop — not rise.
And while having some installment loans is good for your credit score, financing a new home or car when neither is needed can lead to credit problems instead of solutions.
When you’ve found the perfect diversified mix of credit, remember to stick with it, pay your bills on time and keep in mind that no credit score will improve overnight.
Keep reading: This Easy Trick Will Improve Your Credit Score and Avoid Late Payments