Debt and credit

How Different Types of Credit Affect Your Credit Score in Arizona

A credit score is the number that lenders use to determine the risk of loaning money to you. Most lenders in Arizona will check your credit score before deciding how much they will lend you and at what interest rate.

FICO scores, the most common credit determining factor, uses five different categories to determine your creditworthiness. The FICO Score comprises of information from your credit reports which is broken down as follows:

  • Payment history (35%)
  • Debts (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Types of credit used (10%)

As you can see, our primary focus in this article is the last on the list, so let’s consider this.

Many Arizonans aren’t sure how different types of credit affect their credit score. However, with 10% of your FICO score being made up of the kinds of credit used, it’s an excellent idea to pay attention to how the types of credit you are using can affect your score.

We’ll show you the different types of credit accounts and why having a mixed account is vital to your credit history.

Types of Credit Accounts

There are three different types of credit accounts used in calculating a credit score.

  • Revolving Credit Line: Revolving debt gives you a line of credit that allows you to borrow each month. Credit cards are a common type of revolving debt, and they are usually the most accessible. A revolving credit line is very flexible; this is one of the main advantages of choosing it. With revolving credit accounts, you have a credit limit, and you can make at least the minimum monthly payment according to the amount of money you use.
  • Installment Loan: Installment credit has a fixed payment due each month and must be paid back over a set period. Examples of an installment loan include auto loans, student loans, student loans, mortgages, home equity loans, personal loans, etc.
  • Open: Open credit refers to accounts that you can borrow from up to a maximum amount but which must also be paid back in full each month This type of credit includes, utilities, cell phone bills, etc. Open credit is generally associated with charge cards. They also typically come with expensive penalty fees if you fail to pay your balance in full, so they not a smart choice for everyone.

How Does Having Different Accounts Affect My Credit Score?

Credit mix is one of the most common factors used to calculate your credit scores. However, it is also one of the most overlooked by consumers. Maintaining different types of credit accounts shows lenders you can manage different types of debt at the same time. It also gives them a clearer image of your finances and ability to pay back a debt.

While having a less diverse credit portfolio won’t necessarily cause your scores to go down, the more types of credit you have—as long as you make payments at the right time—the better. Credit mix accounts for 10% of your FICO Score and could be an influential factor in helping you get a top score. Maintaining different types of credit demonstrates that you can handle multiple types of loans. Creating the right credit mix can help you reach an excellent credit score status.

Getting the Right Credit Mix in Arizona

There’s no secret formula for getting the perfect balance of “credit mix”. However, an ideal credit mix includes a blend of installment and revolving credit. A simple way to use revolving credit is to open a credit card—and pay your bill on time every month. It is advisable only to charge what you can afford to pay every month to avoid interest.

Having an excellent mix of debt on your credit report is also positive, as it shows lenders that you can be trusted. But don’t take out no credit check title loans in Phoenix just for the sake of diversifying your credit.

Only borrow money when you are actually in need of it, and ensure you can afford to pay back when it is due. Those same debts could quickly sink your credit score if you fail to pay on the set period or end up defaulting on the loan.

The Bottom Line on Types of Credit

If you have only one type of credit, you shouldn’t see a significant impact on your credit score. However, you want to make your credit score as perfect as possible, having credit mix will definitely help you get there.

Achieving a good credit score in Arizona is a game of inches that even a portion as small as 10% of your credit score has to be taken seriously.

If you have any questions, please ask below!