Multiple types of credit help you show a well rounded credit portfolio
The types of credit you have will weigh less in your credit score calculation since it is only 10% of the score. However, that 10% still matters. If you have only credit cards, then you show a financial institution that you know how to use revolving debt. But, it does nothing to show your consistency with a long-term loan that is “paid in full.”
Installment agreements, when paid in hill, are highly favorable because they show that for a certain period, you stuck with the monthly payment, and then paid it off on time or early. Financial companies look at this history in a favorable light.
Open credit accounts are used in the calculation to show that you can make a monthly payment for services rendered and that you have consistently been at the same address or utilizing the same account for years. It is the length of time and payment history that matter with open accounts.
Revolving credit does help, but you have to use it correctly. If you carry a balance, that will be shown. If you have a high balance, consistently, on the card, then it can look less favorable than a low balance with on time payments. Better yet, if you use the card each month and pay it off before the next cycle, you look even better.
Open accounts and revolving credit show a length of credit. They also show consistent payments over the decades you may have the accounts. This also weighs into your score and whether you have “great credit.”
When credit became more desirable, and the credit bureaus began figuring out score calculations, and as FICO became known, this strategy of having more than one type of credit was established in the 1970s.
How it Works
- Have at least one revolving credit account.
- Have at least one installment account.
- Have at least one open credit account. loans.
- Make monthly payments to each account, if possible pay off the balance.
- Only leave a balance on the installment and score. account, such as a car loan or mortgage, as these are usually larger credit accounts that you need several years to pay off.
The payment history, amount owed, and length of the account being open weigh higher, but types of credit can also increase or decrease your score. Too many credit cards work against you as opposed to installment accounts when paid on time will benefit you.
- You want multiple credit types to show a well rounded credit history.
- The credit type does factor into your credit score.
- Installment agreements such as student loans are weighted differently than car loans.
- The more installments you pay off, the better it is for your credit history and score.
- You want consistency in open accounts to show a longer history, i.e. moving less, more stability in your life, and reliability.