Types Of Credit. What Types Of Credit Should You Have?
The more different types of credit you have, the better it will be for your credit score as it will show you as a good borrower and improve your credit mix.
Now there are a huge number of different credit accounts, such as Mortgages, Student Loans, Auto loans, credit cards and more. Most often, however, everything can be divided into three main types of credit. The more different types of credit you have on your credit report, the better for you, as it will show potential lenders that you are responsible for different types of debt. Thus, various types of loans and timely repayments will help you improve your credit score. If you want to know more about the three main types of loans, keep reading.
Read more: Types of Loans You Need to Know About
What Is Credit?
Credit shows the lender how risky it is to lend to a particular borrower. Thus, people with good credit demonstrate to the lender their ability to make timely payments, so such borrowers are more likely to be approved.
So, credit gives you the opportunity to receive additional financing at interest to cope with certain needs. It is important to note that the better your credit, the better interest rates and loan terms you will be able to get. Conversely, a borrower with bad or poor credit will not get the best loan offer.
It is also worth noting that the credit history is maintained and updated monthly by three major credit bureaus: Experian, Equifax and TransUnion. FICO is one of the best known credit scoring companies that lenders use before they approve your application.
Three Main Types Of Credit
At the moment, there are three main types of credit: revolving credit, installment credit and open credit. Each of them has its own characteristics and is suitable for a particular financial situation. However, before moving on to the three main types of credit, let's look at the difference between secured and unsecured credit.
- Secured credit refers to loans that cannot be approved without collateral. Take Auto Title Loan as an example. If you apply, the car will serve as collateral for the loan. Thus, if you are unable to make regular monthly payments, the lender will be able to take your vehicle in order to consolidate the debt on the Loan.
- Unsecured credit means you don't have to provide collateral or risk your property to get your application approved. These include, for example, Student Loans and credit cards. However, it is worth paying attention to the fact that unsecured loans are more risky for lenders, so they often have higher interest rates and less favorable lending conditions (however, this also depends on other factors)
So, now that you know the main difference between a secured and an unsecured loan, let's talk about the three main ticks of a loan:
1. Revolving credit. If you haven't heard of this before, then you should know that revolving accounts give borrowers the ability to borrow multiple times up to a set limit. Thus, you can decide how much money you need at any given time. The borrowing limit is approved by the lender based on factors such as your credit history, income, and so on. One of the most popular types of revolving credit is a credit card. So, revolving credit can include Home Equity Line of Credit, branded store cards, Personal Line of Credit and most credit cards.
It is important to note that with a revolving credit account, the minimum payment is usually a percentage of your total balance. Also, as soon as you repay the amount you borrowed, your credit limit will again be increased to its original state. However, it is important to note that you will need to make regular monthly payments, otherwise you will have to make additional payments and face commissions. That is why experts recommend paying off your debt in full every month.
2.Installment Loan. Most Americans have come across an installment loan at least once in their lives, as it allows you to borrow a fixed amount of money from lenders and repay it in regular monthly installments until the debt is fully repaid with interest. These include Student Loans, Personal Loans, Car Loans and more. Unlike a line of credit, where you can borrow money an unlimited number of times, Installment Loan is a one-time payment. The main advantage of such loans is that you know how long your payment period will last. Also, most lenders allow you to repay the debt ahead of schedule, but some of them charge an early repayment fee.
It is also worth noting that many installment loans are designed to cover certain needs, expenses, or purchases, such as HVAC Loan, Wedding Loan (which are varieties of Personal Loans), etc. These loans can be either secured or unsecured. For example, if you take out a loan to buy a car, then most likely it will be collateral for the loan. That is why you should pay attention to whether the loan is secured or unsecured before applying.
3. Open credit. This loan most often does not have a hard set limit. Most often, payments must be made monthly and the amount mainly depends on your usage. Thus, the amount that you will have to pay will be related to how often you use this or that credit service. For example, your electricity bill would be a good example of what an open credit is, as you will have to pay back what you used this month. You are expected to repay this debt within a certain number of days after you receive it. Thus, cable TV, water, electricity, and cell phone bills are open credit.
The presence of various types of credit in your credit report will show you as a responsible borrower who can pay any type of debt on time. It is the various types of credit that form your credit mix, which directly affects your credit score and what interest rates you can receive on a particular loan.