Continuing on with my 31-day education on credit, I want to talk about why a MIX of credit types is important. If you’re not interested in using credit to advance your personal or professional business goals, than skip this post. However, if you are serious about building a long-term credit file that can serve you for years to come, pay attention.
Your credit score is looked at primarily in two ways:
1) Your score
2) What you have on it
It’s possible to have a 700 credit score and still get denied for a loan. This is because if you don’t have a verifiable history of managing credit, it doesn’t matter what your score is. I’ve seen people who have had high 500 scores and get multiple approvals simply because they had a HISTORY of using credit. Again, in order to be successful with using credit you need to use it. So, when people say “stay away from credit”, or “using credit and getting loans is a bad thing”, I want you think about how Donald Trump was able to get himself back in the Real Estate after he filed bankruptcy. The system of business and credit laws in this country is designed to create wealth, if you know how to use it.
So, what do I mean by having a MIX of credit??
Here are 3 primary examples:
Revolving Credit – Revolving accounts are those that have a different payment each month depending on your . These are accounts that you are not required to pay in full each month and you normally carry a balance from month to month on these. You have the option to “revolve” some or all of the balance to the following month, and lenders charge you interest on the amount that you revolve and this is how they make money.
Installment Accounts – Installment accounts are those that have a fixed payment for a fixed period of time. As with revolving accounts you are not required to pay them in full each month. You are allowed to make a payment that is going to be the same every month until the loan is paid in full. This is the case with auto loans and some bank loans.
Open Accounts – Open accounts are probably the least common and typically won’t show up on your credit report. These are also referred to as “open credit,” which is a hybrid of installment and revolving credit. The payment is never the same each month and it’s usually due in full at the end of each billing cycle. The consumer satisfies his financial responsibility for the account when he pays the bill in full each month. This cycle can go on as long as the consumer has an account.
An account with a utility company is one example of open credit. So for example, if Roger has an account with ComEd for electric and gas service to his apartment, he doesn’t know what his payment will be each month. As you can imagine, electric bills can vary a lot from month to month depending upon the seasons and air conditioner/heater usage. Roger is responsible for this varying payment each month.
Most utilities, cellular service, some American Express cards, and some gas station cards are other examples of open credit. With American Express cards, you are required to pay the balance off at the end of the billing cycle. These cards or more challenging to manage or not everyone will qualify for one.
A mix of accounts on your credit file shows your ability to manage and utilize different kinds of credit. If you have an installment loan such as a car or a bank loan, that’s good, but it’s not as telling as having a revolving line of credit such as a credit card. Having a credit card says that you are more responsible with managing credit because a credit card requires you to actively manage the payments, and the balance. It’s viewed much differently than other credit accounts. Also, when you’re looking to purchase a home lenders will look favorably at a mix of accounts.
PROBLEM: Your credit suffers from diversity!
SOLUTION: You should think about getting different types of credit accounts, on purpose, so that you can build a stronger file. Not everyone is going to purchase Real Estate, but I would recommend revolving accounts like Capital One credit cards as well as some department store cards such as Target or Macy’s. You can also purchase tradelines, which are credit accounts that you can be added to. Or, if you know someone that can add you as an authorized user (someone who has access to be added to a credit account for usage and reporting purposes) that can work as well. There are vendors that will sell you tradelines to be added to your report but this is something that you need to be careful of. If you have any questions about that, please ask!
2015 CREDIT RESTORATION PROGRAM
If you are interested in our Credit Restoration Program where we consult our clients on restoring their credit profiles to align with their personal and professional goals email me now at email@example.com with the subject line, “Credit Coaching/Consulting Services” to schedule a 30-minute consultation. I want to START you off on the right foot in 2015!
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