Your credit score is used to tell creditors how likely you are to pay back on any type of credit account you have. So the higher the score you have the more likely you are to pay back, and the less of the score you have the least likely you are to pay back. It’s quite a simple system but if you are not careful it can significantly impact you. Think of your credit scores like a grade, and any lenders like your parents. The higher your grade was in school the happier your parents were with you, the worst agreed was in school the angry or your parents would get. It’s exactly the same concept.
So when it comes to credit, it seems like it’s a general statement. But in reality, credit comes in all different forms. Such as loans, mortgages, car payments, and even service payments. So let’s take a look at the different types of credit and how can impact you and your credit score.
There are five main types of credit that you will encounter almost anywhere. Most lenders offer their borrowers the following: revolving credit, installment credit, open credit. Alongside these are also unsecured credit and secured credit.
Revolving Credit. This is one of the most common types of credit out there. You are able to use this credit type freely, but it does have a cap. This cap is referred to as a credit limit mostly based on your credit score. For example, the better your credit score the higher the limit. Revolving credit applies mostly to credit cards, you can charge the credit card up to the cap and make a payment on it to clear it off. Although it is not limited to just credit cards, home equity loans is another example. If you are looking to refinance your house you can take an equity loan and use that money. When it comes to this type of credit you are expected to pay the monthly payments towards the loan and any interest charges that may accumulate.
Installment Credit. This is another type of credit account that’s fairly common amongst people. You have a fixed amount of credit where you’re paying a fixed amount per month as well. There are many types of loans that fall under this category such as student loans, car loans, mortgages, phone bills and anything else in these categories.
Open Credit. This type of credit account is a lot rarer for people to use. The reason people don’t use open Credit as much as because can be a lot harder to keep track of. With open credit, you’re allotted a fixed amount and by the end of the month, you’ll have to pay the full amount back. Supreme example supposes you have an open loan for $10,000 and you use all $10,000 in one month, you’ll have to pay off the loan in that one month. That doesn’t mean open credit is not something people would consider, it’s a quick way to get money up front and a quick way to get rid of the loan.
Unsecured Credit. This credit account is like a credit card, it’s when the lender trust you based on your credit score and allows you to make payments on your own. This is built on the trust factor of you paying back any debt.
Secured Credit. This is a common credit account. When an individual applies for a mortgage or an auto loan they will be given a secured credit. This means that the lender would take collateral against the loan and it will be held a lien. Therefore, if you are unable to pay for the loan it is quite possible it may be taken away. Using the secured loan type is a great way to help build credit for people with no credit history. It’s a great way for institutes to have an incentive in case you default on any payments.
Now that you’re familiar with these types of credit accounts it should make a little bit more sense as to why a mix of credit factors in at 10% in your overall credit score. But for many Borrowers, The Sweet Spot for credit is actually revolving credit and installment credit. It helps show that irresponsible and balancing your credit and making payments on time. It’s always better to have a mix of credit to show your responsibility that way you won’t be rejected for any loans that you’re looking to take
Giving that advice, you shouldn’t go and open as many accounts in hopes to raise your credit score. Going out and opening many different credit accounts can actually negatively hurt your credit score. So we highly recommend that you find the perfect credit mix for you that aligns with your lifestyle, so when you’re ready to make those next steps towards your financial Milestones you’ll be able to so hassle free.