Different Types of Credit – How to Maximize Your Score?
There are five main factors that make up a FICO credit score – payment history, amounts owed, credit history length, new credit and types of credit used.
While the “types of credit” category only factors for about 10 percent of your overall FICO score, it can mean the difference between a good score and a great score, so it’s a category not to overlook if you’re on a mission of credit repair.
First, it’s important to note that there are two main types of finance loans: revolving and installment. Installment loans consist of things like auto loans and student loans — money that is loaned with the expectation that it will be paid back in a relatively short period of time. Revolving loans, which are things like credit cards and bank cards, involve debt that is accrued and, ideally, paid off on a monthly basis (i.e. debt management).
For the best possible credit score, it’s recommended that consumers try to establish a good balance between installment and revolving loans. But here’s a credit tip — there’s one other type of loan that can greatly aid your credit score for the better in the long-term: a mortgage.
When you’re first approved for your mortgage, it’s likely that your credit will take a hit in the near-term. But a mortgage is good for your credit score in the long run for two big reasons. One, it qualifies as a type of credit used. And two, if you make on-time mortgage payments, it will reflect well in the payment history portion of your credit score, which makes up 35 percent of your FICO score.
With all this being said, it’s also worth mentioning that just because you have a variety of installment, revolving and real estate loans to your name doesn’t mean you’ll have a pristine credit score. Like we mentioned above, on-time payments are key. And it’s also key that you don’t have any unpaid loans that are taken on by collection agencies, as it’s hard to repair credit when you have something that could stay on your record — and influence it in a negative way — for up to 7.5 years.
So while diversifying your credit is important, it’s important not to overlook other factors that go into the makeup of your overall score as well.