How Types of Credit Affect Your Credit Scores?

Undoubtedly, all the different types of credit share a direct relationship with credit scores. But before you rush in to overload yourself with a stack of cards, it’s important to understand this relationship. Your credit scores reflect your creditworthiness — that is, the level of trust credit companies will place on you. A bad credit score sends negative signals about the user. In the same vein, a good credit score officially endorses you as a reliable borrower; giving you a better chance of securing loans from creditors. Is it a good thing to have more or fewer credit cards? Read further as we discuss credit types and their effects on your credit score.

Factors That Constitute Credit Scores

Payment History

Do you settle your debts in a timely fashion? This element contributes a large percentage (about 35%) of your overall scores. Making late payments reduces your credit score while making timely payments increases it.

Credit Utilization

This the ratio of the amount you owe (debt) to the available credit on your card. When this ratio shoots up to over 30%, it can spell doom for your scores.

Credit History

People with great credit scores have a long history of credit, usually about 11 years for each card. Credit history represents about 15% of the score. But thanks to tradeline reseller, it’s possible to turn around your bad credit history and make it a good one.

Credit Diversity (Mix)

It’s advised that you spread your portfolio to cut across different accounts such as retail, a mortgage, and credit cards. Your score will suffer if you open numerous accounts of the same type. The credit mix also accounts for 10% of the scores.

New Credits

When you open multiple accounts within a short time, it can negatively affect your credit score. New credit accounts for up to 10% of your score.

Types of Credit

Credit accounts can be categorized into 3 main kinds — revolving credit, installment credit, and open credit.

Revolving Credit

This account type is very common. It allows you to freely borrow money, but it comes with a credit limit, stipulating how much you can spend at certain times. Moreover, there is a requirement for monthly payment, plus interest (if there’s a balance)

Installment Credit

This is more like a fixed loan; a repayment plan is set on a regular time interval. Examples are mortgages, student loans or auto loans etc.

Open Credit

This account type is a bit rarer. Few people get to see this in their reports. What happens here is that, users can borrow an amount of money, but they must pay it back in full each month.

How Credit Types Affect Credit Scores

What’s the key to building trustworthy credit scores? Well, there’s no single way to scoring well in your credit reports. Opening different account types may contribute positively to your score, but only if you are responsible enough and pay debts when they are due.

It’s very detrimental to open several accounts without using them actively — you will incur unnecessary fees and it will cripple your scores and label you as high risk to lenders.

The bottom line is that, irrespective of the account type, the health of your scores boils down to your borrowing and payment habits. Spending wisely and settling outstanding debts adds trust to your scores.

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About the Author: Rounak

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