The Importance of Credit Variety
Having a variety of different kinds of healthy credit accounts can help to increase scores. When a consumer shows they can do well at managing many accounts of various types, over a period, they would be a lower risk than someone with limited credit.
Lenders want to know that the consumer they extend credit to will be able to pay it back in a timely fashion.
How would a lender know if a consumer could handle managing many accounts if there is no history they ever did? Since statistics show that those with limited credit are at much greater risk for defaulting on a loan, FICO scores give the consumer with a better variety extra points. A consumer with a car loan, a mortgage, a few credit cards, and a student loan might very well be a better risk than someone with one credit card.
Remember, if a consumer has one account and is about to apply for a loan, runs out and opens three credit cards a month before applying, it will not immediately boost the credit scores. In most cases the situation will drop the credit scores since new credit hurts credit scores until it becomes seasoned. Consumers should prepare well in advance by building a variety of credit before applying for a loan.
Secured Credit cards – These cards are great for establishing or building credit history. They require a deposit which is used as collateral for the credit card. You are given a credit line while reporting your payment activity is reported to the credit bureaus. By making timely payments to your creditor and maintaining low balance to limit ratios you will build better credit scores. These cards usually charge a higher interest rate, annual fees, or some even charge high monthly fees due to the greater risk of the applicant.
Student Credit cards – Most students need a credit card but usually do not have enough of a credit history to gain approval. Student cards are designed for those enrolled in four-year colleges and universities to help them build a credit history over time. Unlike regular credit cards these cards are often scaled back scaled back in terms of rewards, features and other benefits, but they can still be a valuable commodity. If used wisely, a student can take the first step toward building a solid credit history with this type of credit card. Once they’ve proven financial responsibility, it will be much easier to qualify for reward cards and higher credit lines. Most student loans have moderate to high interest rates and some have annual or monthly fees.
Rewards Gas Cards – These cards allow consumers to earn higher cash back rebates for gas along with a % on all other purchases. They give consumers the opportunity to reduce the high cost of driving with their everyday credit card spending. Cash Back cards- these cards feature reward programs that offer cash back rebate incentives. They reward you with cash back incentives and rebate programs. They usually require a good to excellent credit rating for approval.
Instant Approval Offers – These offers promise an instant response not an instant approval of credit. They promise to give feedback within 60 seconds of application online. Most cards like this will give instant approval if the applicant has excellent credit.
Balance Transfer cards – Designed to help people consolidate their credit card debt onto one card. Usually consumers look for a lower interest rate card for the transfer. Be sure refrain from maxing out limits when using this type of card since that could reduce credit scores.
Revolving credit allows the borrower to make the choice of maxing out a card and paying as little as desired (not less than the minimum payment of course) or paying off the entire balance each month.
Installment loans or credit are a type of financing that has a fixed number of payments – you pay the same amount each month for a predetermined number of months.
A few examples of installment loans are auto loans, mortgages, and student loans. Getting an installment loan can be harder than getting a revolving line of credit, this is because the loan is usually much larger and lenders like to see a history of managing revolving credit before approving a larger loan.
The balance to limit ratio with installment credit does not impact the score as much as revolving credit. This is due to the nature of how the payments are set; consumers don’t decide how much they will pay monthly, but only if they will pay on time. They are not in control of making all the decisions; therefore, the balance does not weigh as heavily on scores.
Having an assortment of different accounts is important for having the best credit scores and will allow you an easier, more affordable, and stress-free process when shopping for a mortgage or other large loan.