Understanding The 3 Types Of Credit And Their Effects On Your Credit Score

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Having a good credit mix improves your score and alerts lenders you can handle debts well. But how do different types of credits impact your finances and your score? There are three main types of credits; installment credits, revolving credits, and open credits.

Here’s a guide to understanding the three types of credits and how they affect your credit scores:

Do I need to have all three credits to boost my score?

Having all three credits on your record shows that you have substantial experience handling multiple debts simultaneously. The mix also affects your credit score. However, this doesn’t mean you need to have all three on your record. The combination accounts for only a tiny percentage of your credit score. Other factors play a significant role in your credit scores, such as timely repayments and monthly bill payments.

Additionally, it’s worth a shot to understand how each credit works to figure out your best options.

  • Installment credits

You borrow a fixed amount for installment credits and repay it with fixed monthly repayments over a pre-decided period. You are obliged to pay off the amount by the agreed-upon date by signing the agreement.

One of the best installment loan examples is title loans and equity loans. Some lenders allow you to pay more than the fixed amount for installment credits to pay off the loan early. So, check with your lender first and look through your contract to see if they charge any penalties for early payments or not. 

  • Revolving credit

A typical example of revolving credits is credit cards that enable you to borrow multiple times up to a specific pre-decided limit. You will have to repay the debt by making monthly or one-time repayments. Since credit cards always have a spending limit, you won’t be able to use the card further if you reach that spending limit.

If you pay less for a month or cannot pay, you will be charged with late payment penalties and accrued interests. In addition, credit cards with balances tend to have high-interest rates, so you must be very careful about the repayments and credit limit.

See also  5 ways your website design can encourage visitors to spend more money.

There’s always been a lot of debate on installment credit vs. revolving credit, but you can decide which one suits the best based on your financial situation. 

  • Open credits

An open credit may have a credit limit, too or not, depending on your situation. Your income, credit history, and credit score will determine your limit in case of open credit. Some examples of open credits are utility cards and charge cards. Open credits require you to pay in full in the following month or risk heavy penalties or closing of your account.

How do they affect your credit scores?

  • Revolving credit: Revolving credit or credit cards directly impact your credit utilization ratio, which is the second most significant influence on your score after payment history. Using revolving credits carelessly can ruin a perfect credit score pretty quickly.
  • Installment credit: For these, each late repayment or missed repayment will affect your credit score directly.
  • Open credits: Each time you get an open credit, your credit score is temporarily hit until you pay off the amount on time. Lenders make hard inquiries to determine your loan application, and those inquiries affect your score no matter if your application is accepted or denied.

What other factors play a role in my credit score?

The credit mix only factors for about 10% of your credit score, leaving you with control of the other combined factors that impact your score by 90%. These factors are:

  • Your payment history- 35%
  • Debt owed- 30%
  • Credit history length- 15%
  • New credit- 10%

Needless to say, the payment history impacts your credit score the most and hence must not be neglected. No matter what kind of credit you have, make the repayments on time to maintain a good credit score.

Read Also: The Case of Daniel Patry

Conclusion

Having a good credit mix can help you get credits, but it’s a must. If you already have a good credit mix, make sure you repay all of them on time, or your score might take a huge hit. On the other hand, if you don’t have all three credits, you still have control over all the critical factors that affect your score by almost 90%. We hope this helps you better understand the types of credits and how they impact your credit score.

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