Building a good credit score begins with understanding how this number is calculated and what factors are influential. FICO score is usually determined by five categories: the payment history, the amount of the debt, the length of the payment history, the new credit, and the variety of credit types an individual has.
While most components of good credit score formula are clear without explanation, the impact of having diverse types of credit is vague to many consumers. Let’s find out why having a variety of credits is important and how this could help you to improve your credit score.
The Types of Credit That May Affect Your Credit Score
In order to understand the importance of having a variety of credits, it is essential to know what types of credits can be mixed and what impact they have on your FICO score.
Installment credit is a type of loan when a borrower takes a fixed amount upfront and returns it by making monthly payments over a certain period of time. The amount of payment is the same every month and includes fixed or variable interest rates. Mortgage, car loans, student loans, and some personal loans for major purchases are the most common examples of installment loans.
Taking an installment credit and making on-time payments has a great influence on your payment history that determines 35% of your credit score. If you did not manage to get approved for an installment loan and urgently need fast loans online, you may consider the services of the web-based loan providers. There are many companies that cooperate with a wide range of lenders and cooperate even with borrowers with low credit score (on special terms, of course).
Revolving credit allows borrowing a certain amount of money but the payment schedule is not pre-determined. A borrower may decide how much to pay each month. The balance can be carried over to the next month. The credit decreases when you spend and increases if you pay off the debt. The most common example of revolving credit is a credit card, but it can also be a home equity line of credit.
Open credit is a mix of installment and revolving credit characteristics. The monthly payment depends on your usage and has to be fully paid before the due date. Utility bills and cell phone payments are the common examples of open credit. Although open accounts cannot do a lot for boosting your credit score, not paying them can ruin it as the utility organizations usually report delinquent payments.
Why Having Diverse Types Of Credit Can Help?
Although the category of the different type of credits takes only 10% of your FICO credit score, it is very important if your credit history is not too long. If your credit report has multiple items, the lender can easily determine if you are a reliable borrower.
In case you have a short credit history, the lender is likely to pay more attention to the types of credit you have. For example, an individual has a lot of credit cards but has never taken any installment loans. It shows that a customer charges expenses, but there are no proofs of the ability to make regular fixed monthly payments.
Thus, the variety of accounts can tell more about you as a borrower and improve your credit score.
How Does Variety of Credit Can Improve Your Credit Score?
Diverse credit cards allow the lender to make the assumptions about you as a borrower. Each type of credit can contribute some good characteristics to the whole picture of your finances. If diverse credits show that you are a reliable borrower, your credit score will be increased.
Installment credits help to build a good credit history which is a big part of the total score. They may also provide some additional information about the borrower. For example, a student loan shows high earning potential as an individual has a college degree.
As for the revolving credits, they should not be overused. Taking too much of revolving credit may show that your finances are not stable and you often need quick financial support.
When it comes to open credits, the most important is to pay them on time. While they do not influence your credit score much, the delinquent payments remain on the record for seven years and could decrease your credit score.
Remember the Basics
Combining different types of credit can give more information about you as a borrower. If everything is in order, a variety of credits is likely to be the bonus. However, the new accounts should be opened only when it is necessary. If you have numerous accounts but do not keep up with the payments, it will not help your credit score. Use the mix of credits wisely to improve your FICO score and not to hurt it.