Maintaining a solid credit score isn’t just about making on-time payments and keeping a low debt utilization ratio. Although these are two of the main criteria that credit agencies use in their formulas, they aren’t the only ways to improve credit scores. The major credit agencies also review the diversity of the accounts you have on your report—and that counts for 10% of the formula they use to determine your creditworthiness. Basically, they want to see that you have experience managing a variety of loans and accounts, such as a mortgage, a credit card, and an auto loan. People with the highest credit scores tend to boast a diverse mixture of accounts. Keep in mind that there is no magical set amount of accounts that will work for everyone, and the best blend for you will depend on your unique financial situation. Generally, you want to have at least three different types of accounts on your report. Here are three accounts that can help you improve your credit score.
When you take out a significant loan for a large-scale expense, such as a home or a car, that’s known as an installment loan. You’ll generally agree to a fixed amount up front and then pay the same amount every month, with a certain amount earmarked for interest and the rest going toward the principal balance on the loan. Examples of these include a home mortgage, car loan, student loan, or home equity loan.
Why they help: Installment loans are an excellent way to boost your credit history. With a history of on time, regular payments, you’ll show potential lenders that you can handle larger loans.
As opposed to installment loans, you do not have a set payment schedule with revolving credit. Two common types of revolving credit are credit cards and lines of credit from a bank or credit union. Although you have a limit that dictates how much you can borrow—and minimum guidelines for monthly payments—it’s up to you to decide how much you want to pay. (Debit cards are not considered revolving credit, as they are treated like cash and therefore do not get reported to the credit bureaus.)
Why they help: As with installment loans, these types of accounts give your credit score a boost when you build a history of timely payments. However, moderation is key here. Lenders don’t want to see numerous credit cards open with several significant balances, which could indicate you’re overextended and in financial trouble. Revolving credit tends to be the area that causes the most trouble for consumers, but when used appropriately can be essential to establishing a solid credit record.
You pay your water and electricity bill each month, which typically varies depending on your usage. These examples, as well as other utilities such as sewer and phone bills, are what agencies consider open credit. The amount you pay is different from month to month, but you’re always expected to pay in full. These types of accounts are basically a cross between revolving credit and installment loans.
Why they help: You won’t see any difference in your credit score if you make these payments on time every month. However, missed payments will almost certainly appear on your credit report if you’re delinquent for 30 days or more. That’s why you should always make it a priority to budget for these bills first.
The Bottom Line on Improving Your Credit
It does help to have variety in your accounts. You’ll be proving to potential lenders that you’re able to responsibly manage several different kinds of accounts, making your credit risk fairly low. However, experts caution against opening up new accounts just to achieve that perfect mixture—especially if they come with high fees or you don’t intend on using them. Paying your bills on time and being mindful of your spending habits will go a long way toward improving your credit score as well.
When you’re trying to build up, fix, or repair your credit, it’s best to focus on only a couple of different accounts. Then, once you’ve established a solid payment history, you might consider a low-interest personal loan, or a CD-secured loan, to add some variety to your credit mix.
The factors that determine your credit score can be confusing to even the savviest consumers. If your credit report could use a tune-up, contact us for a free consultation. The professionals at Ovation Credit are here to help guide you through the process of repairing or building up a positive credit history, as well as complex issues like credit errors and credit disputes.