What Types of Credit Should I Use?

When building your credit wisely it is important to know what types of credit are available and how they can benefit you. Each account type can have a different weight on how it factors into your credit score.

1. Mortgage Accounts. A mortgage account is an installment loan with a fixed payment (typically). The length of the repayment term is set when the loan is closed. Not all, but most home loans are 360 months or 30 years. A mortgage account is a top tier account when it comes to benefiting your credit. It is also regulated and there are guidelines for getting approved. Using a 4 star rating system for example, a mortgage would be 4 of 4 stars.

2. Installment Loans. An auto or student loan are examples of installment loans. An amount is borrowed and a set repayment amount and schedule is determined. Auto loans are typically 36, 48, 60 or 72 months from the purchase to the payoff. Making consistent on time payments will give you the maximum benefit from a 3 of 4 star installment loan.

3. Revolving Lines. Revolving lines are typically credit cards or charge accounts. Revolving lines may not be the 4 star account type however you do get one major benefit from a credit card over an installment loan. revolving accounts like credit cards have no end date or fixed payment. When an installment loan ends, credit cards live on. When used responsibly and pad timely a credit card can be your best friend in building your credit for the long term. Remember, 15% of your credit score comes from the length of history. it is very hard to get ten years of payment history on a 5 year car loan.

4. Retail Store Cards. For a lot of consumers the first credit line they open may be a department store card. Many stores offer a 10-20% discount for opening a store card. While this sounds great at the onset, always think about the inquiry on your credit, having a healthy mix of credit, and the interest rate on the card if you carry a balance. The savings are nice, but at what cost. Store cards typically come with a very low limit as well. Limits are not as important as the usage, but a consumer with a few low limit store cards will find it more difficult to reach the scores of a consumer with major credit cards and low balances which leaves retail cards at just 1 of 4 stars.

Now that you have a solid base on the different account types and their weight you can move forward with building your credit. A solid suggestion for starting with no credit or poor credit is to go for a secured credit card through a major bank. Be responsible and watch your positive history build up. Next may be a car loan and ultimately a home loan.

Michael ClarkWhat Types of Credit Should I Use?

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