At present, credit accounts are available in various forms, including mortgages, credit cards, student loans, etc. Credit accounts can be categorized into three types of credit. Another thing to note is that the types of your credit accounts will affect your credit score. If your credit score is high, it will be easier for you to get loans from your borrower. Moreover, it will also allow you to obtain a higher amount as a loan. The rates of interest will also be less in that case.
In the article, we have mentioned the different types of credits and how they affect your credit score.
Different Types of Credit
As mentioned earlier, you will come across three types of credits:
- Instalment credit: This is a loan for a specific amount of cash along with a regular and fixed repayment plan. The loan has to be repaid in regular fixed payments along with interest. You can consider the account to be closed once the credit card bills have been entirely paid off. Instalment credit comprises several types of loans, including mortgages, auto loans, personal loans, etc.
- Revolving credit: This one happens to be a type of credit that you can borrow repeatedly. Moreover, the credit card bills have to be repaid up to a maximum limit from just one line of credit. You will have complete control over the amount which you have borrowed. You can consider credit cards to be ideal instances of this type of credit. It typically consists of monthly payments as well as interest charges in case your balance is unsettled. You can borrow more cash whenever you want if you haven’t exceeded the optimum limit.
- Open credit: It is a fact that this type of credit is not that common, and not many people use it. In this case, the monthly payments are going to vary to a great extent. On top of that, you have to pay the credit card bills after every single billing cycle. It is usually linked with charge cards which you should not confuse with credit cards used in revolving credit. One typical example of this type of credit is your power bill. However, the due amount will depend on the amount of electricity consumed by you during that month.
How can your credit score be affected by different types of credit?
Having different credit types will affect your credit score significantly. It shows the lending company that you can handle different types of debt without any problem whatsoever.
Nevertheless, one cannot say for sure how many accounts you will require from each type of credit for demonstrating the proper credit mix. The term “credit mix” refers to various credit accounts, including credit cards, personal loans, and home loans.
Simply speaking, a good credit mix, as well as the ability to repay credit card bills on time, will help to enhance your credit score. The reason for this is that the lenders will be able to comprehend that you’re responsible in that case. Nevertheless, your credit score will be negatively affected if you cannot pay back the amount borrowed on time.
This implies that if you can open plus maintain various types of credit, you will boost your credit score. Make it a point to apply for multiple credit accounts if you want to use credit without padding your credit reports. It will not be a sensible idea to open those credit accounts that you will not use.
Thus, the above discussion shows that a healthy credit mix can positively affect your credit score. If you can use only a single type of credit product responsibly, your credit report will improve. However, if you don’t require the money, taking on additional credits will not be a good idea. Nevertheless, a different product can be added to your credit mix if you like to boost your credit score. For example, you can opt for credit cards to manage your expenses better if you have a personal loan only.
Hey, this is Johny Sehgal. I am the owner and caretaker at Finance Jungle. I completed my education in BSC and now heading towards the digital marketing industry. I usually have interests in reading, playing games and watching movies. I also love to write content based on quality information. The main motive of mine is to provide the top and best quality information to my readers. Finance Jungle is the blog for the same.