Not all credit is created equal. The credit bureaus, along with each of their scoring models, all take into consideration the types of credit accounts in a portfolio. While credit mix only accounts for 10 to 20 percent of a credit score, it’s important to familiarize yourself with the three basic types of credit accounts and understand how to manage them properly. The Three Types of Credit AccountsRevolving Credit cards are the most common type of revolving credit accounts. Credit is extended to you on a revolving basis, up until the maximum amount. Once you make your payment — minimum or otherwise — the remaining balance will be rolled over into the next month, subject to finance charges. Installment Mortgages, auto loans, student loans and personal loans are considered installment loans because you are required to pay a fixed sum each month until the loan is paid off. The monthly payment is based on such factors as total amount borrowed, the time period of the loan and the agreed-upon interest rate. Of course, you are free to pay more than the installment amount each month, which can accelerate the term and may trigger prepayment penalties. Open This type is not usually considered a credit account, but it very much is. An open credit account would be one taken out with a utility, cable TV, internet provider or a mobile provider. While not considered credit in a traditional sense, the service provider is expecting you to pay your bill each month, and some providers may run a credit check before initiating service. Open accounts do not usually charge interest — though they might for any unpaid balances — and can appear on credit reports if the service provider reports late payments. Why a Mix of Credit Types Is ImportantHaving a mix of credit account types and paying them off as per your borrower agreements can help demonstrate responsibility to different types of lenders. Banks and financial services companies may consider you less of a credit risk because you’re demonstrating an ability to successfully manage different types of credit and the payment terms associated with them. Indeed, opening and maintaining different kinds of credit, such as a credit card and an auto loan, can help build a credit score. However, because credit mix only accounts for about 10 percent of a credit score, it’s not a good idea to open a new type of credit line simply in hopes of boosting a credit score. Raising Your Credit ScoreBecause each credit agency calculates its own credit score using its own models, differences between reports can produce vastly different credit scores. Most borrowers seek the highest score possible, of course, and one that is consistent. The ability to view, understand and manage your credit is key to putting yourself in the strongest position when applying for a mortgage. Sources: Fico – What Does Credit Mix Mean? TIME – What are the 3 Types of Credit? Experian – How the Right Mix of Credit Can Boost Your Credit Score The post Revolving, Installment and Open Accounts: What to Know About the Three Types of Credit appeared first on SmartCredit Blog. from https://blog.smartcredit.com/2021/07/12/three-types-of-credit/
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October 2020
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