These Are the Types of Credit You Need to Know

Having good credit can save you money – up to $10,000 on a new car purchase and nearly $50,000 on your home mortgage.

It pays to have good credit. Whether you’re trying to build new credit where you had none previously or you’re trying to repair your bad credit, there are some things you need to know. 

First and foremost, you need to know what types of credit are out there and how each can help you achieve your goals. Read on to learn what they are and how you can take advantage of them in pursuit of good credit.

Types of Credit

There are three major types of credit. Each credit type works and affects your overall credit health in a different way. Knowing how to use these different types of credit can make a big difference in your credit score.

Revolving Credit Account

This is the type of credit you may think of when you think of credit at all. Revolving credit consists of lines of credit that you can borrow from freely, though they come with maximum spending caps (credit limits).

Credit cards and home equity lines of credit fall in this category.

You will make payments on these lines of credit each month, and you’re only required to pay a minimum amount (rather than the entire balance) each month. The rest of your balance will roll over to the next month as long as it remains unpaid.

How to Use Revolving Credit

It is best for your overall credit score when you use 30% or less of your revolving credit limits month over month. While this number is more of a guideline than a hard and fast rule, most credit reporting agencies agree that spending less is best.

More importantly, make sure to pay your revolving credit bills on time. Using this type of credit correctly allows you to build trust among the reporting agencies and lenders, and it lets them know that you repay your debts. 

Installment Credit Accounts

This is the other relatively common type of credit. Installment accounts are fixed-amount and fixed-term loans with regular payment schedules. 

These include home mortgages, student loans, auto loans, and other personal loans. Typically, these are much larger amounts of money and blended for big purchases, and they take many years to pay off.

How to Use Installment Credit

The general advice is that a mix of credit types makes the best formula for raising your credit score. That means installment accounts are important. They serve as another opportunity to show that you can make regular payments on time.

The extra benefit of this type of credit is that it often comes with significantly lower interest rates than revolving credit. So paying the minimum on these loans can keep your credit active without large penalties.

It may not feel good to carry a monthly car payment of a couple of hundred dollars, but it costs a lot less than the regular credit card bill.

Open Credit Accounts

While these credit accounts are the most common accounts, few people associate them with credit or credit score ratings. 

Like revolving credit, these are lines of credit that accumulate each month. The difference is that these must be paid in full each month and don’t accrue interest over time. 

Open credit lines include things like your utility bills or cell phone contracts.

How to Use Open Credit

Open credit accounts don’t typically show up on credit reports and don’t have much of an effect on your credit score.

They only come into play when you are late on a payment. When the company to which you owe money reports your delinquency or sends your account to a collection agency, credit agencies are notified. This can have dramatic effects on your score.

The best plan for handling open credit is two-fold. First, don’t enter into open credit agreements that you cannot afford or don’t need. Second, pay your bills on time.

In many cases, companies will work with you to get even the bills you can’t afford paid off in a timely fashion without resorting to collections agencies. In these cases, it’s best to call those companies and ask for help.

Other Tips

Regardless of what type of credit you have, there are a few simple rules you must keep in mind if you want that credit score to rise rather than fall.

Know Your Score

When you know your standing with the credit reporting agencies, you can be sure to never be surprised by a damaging score. Free tools like this are available to help you see both your credit score and your credit report

Maintain a Good Mix

It is important to have a good mix of these types of credit. Reporting agencies say that 10-20% of your credit score depends on credit mix.

Pay Your Bills

The ratio of your debt to your income plays a huge factor in your credit score’s calculation, as do things like late payments and submissions to collections agencies.

Make sure you pay your bills on time to the best of your ability to ensure that you don’t get behind an ever-growing wall of debt and to keep your score as high as possible.

Limit Your Applications

Every time you apply for credit, the reporting agencies are notified and it goes into your score tabulation. Do it too many times or too often, and you will be penalized. Try to wait at least 6 months between credit applications.

Credit Is Your Friend

Whether you’re buying a house, leasing a car, or simply applying for a new credit card, your credit history and score are major factors in how much you’ll spend in the long run. 

Make sure you’re informed about the types of credit and how to use that credit to avoid getting caught off guard with loan denials or sky high interest rates.

Check out our service packages to get a better handle on your credit and to plan for a future of credit security.