Types of Credit and how they Impact your Credit Score

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Having a poor credit score may not be the end of the world for you–but it certainly limits your future endeavors when it comes to bigger purchases.

Unless you are sitting on a big mountain of cash, the most often sought after approach to buy a home or your first car is, take out a loan.

Which brings us to credit. What is it? How does it impact you for the better and for the worse? What types of credit are there and what is a good score to have? These questions and more will be answered in this article, so you have a better understanding in how certain types of credit can impact your credit score and more importantly–your future.

Credit Score

Credit 101: What Is It?

When the haves gives to the have-nots but with conditions attached, is a form of credit. Or, when one party trusts to provide another party a valuable resource that will need to be reimbursed over a period of time.

Typically, there will be a risk associated with this kind of lending. The higher the risk, the higher the interest.

What Is A Credit Score?

Furthermore, a credit score is a system that lenders use to evaluate the risk involved in lending a party money. Banks, mortgage companies, landlords, credit card companies and cable providers may all look at your credit score to determine what they will provide or lend you.

 What Is A Good Credit Score?

According to one of the leading credit reporting agencies, Experian, a credit score above 700 is considered good, while a score above 800 is immaculate. Most people fall in around 600-750. Anything below the 500 mark is getting dicey.

 Why Is It Important To Have A Good Credit Score?

It certainly will help in lower your interest rate, but it also establishes trust to financial institutions and lenders. This will allow you to qualify in taking out a higher amount of money if you decide one day you want to buy a home or a nice car.

It’s also good for self-esteem, image, and can even affect what kind of job you get.

What Are The Types Of Credit?

According to Credit Karma, there are three types of credit accounts out there.

 Revolving:

This is the most common type of account, that are typically affiliated with credit cards and different forms of payment arrangements by the month.

Moreover, a minimum portion is often required to be paid, in which a remaining balance is rolled over or revolved to the next month usually involving a higher interest rate.

 Installments:

The borrower is required to pay a fixed sum of what was borrowed each month until the balance is satisfied. A good example would be a college loan.

Other factors include interest rates and the time period of the payment arrangement.

Open:

These kinds of accounts usually don’t reflect on your credit score unless you default on the payment arrangement. There’s usually no interest involved either, which is one of the reasons it doesn’t get reported to Experian or TransUnion.

Most often, this will involve a cable bill or a cell phone, in which a particular amount is required to be paid in full each month.

 How They Impact Your Credit Score?

As noted, the account that has the least effect on your score is the open account. However, on the installment and revolving accounts, if you end up paying late regardless of the example, this can produce a penalty towards your credit score. If you don’t pay the balance at all, a collections agency will get involved, which will spell disastrous for the score overall jeopardizing what you are able to qualify for.

But, if you take out that credit card, pay your bill on time and keep everything in good standing, this will help you improve by boosting your credit score.

 The Final Score:

If you take into account everything above, then having good and bad credit should be important to you and your future. While it’s never too late to build better or good credit, you don’t want to get into the habit or building bad credit.

For a brighter financial future, be mindful and careful of the different types of credit accounts you have. If you do this on top of paying your bills on time, you will have no problem keeping your credit score in good standing.