How Many Types of Credit are There?
One of the ever-elusive factors that goes into calculating your credit scores is called your “Account Mix”. This category accounts for ten percent of your total credit score, and is based entirely upon the accounts that you have open.
What is “Account Mix”?
The account mix category is broken up into the following loan types:
Revolving Credit Accounts
Mortgage Loans
Auto Loans
Student Loans
These types can change based on your account and what loans you can claim.
Lenders look for borrowers with many different types of credit accounts because it proves that the borrower is interested in improving their financial situation in all aspects of life – including mortgages, auto loans, and student loans. In other words, it means that you have a more extensive background in credit. This makes you more likely than other credit users to pay back your loans on time.
At the end of the day, lenders want a knowledgeable borrower who is going to pay their account. In order to become this type of borrower, you’ll need to expand your horizons beyond a simple credit or retail card. You may need to pair your credit card with an installment loan, auto loan, or a student loan. While you are going further into debt by expanding your credit accounts, you are actually increasing your chances of being approved for further accounts.
As long as you stay on top of your finances, everything should fall into place. At least, that’s the goal.
How Can I Improve My Account Mix Score?
Improving your account mix score is a pretty straightforward process. You’ll need to follow these steps:
Determine a need in your life for a credit account. Do you need a new vehicle? Are you looking for a house? Are you interested in going to college?
Once you find a use for a new credit account (and you have the finances to make payments every month), start looking for the right lender.
After you find the right lender, get yourself approved for the account and begin making payments. In time, your account mix score will improve greatly – as long as you’ve opened an account in a category that you didn’t previously hold an account in.
Unfortunately, there aren’t many other ways to improve your account mix. There aren’t any secrets or backdoors to be followed. Instead, you need to gradually open new accounts, maintain your payment schedule, and avoid closing accounts – even when you stop using them (this applies mostly to credit and retail cards).
With that being said, you can also improve your credit by becoming more knowledgeable about the different types of credit accounts for which you can apply. While most websites only list student loans, revolving credit accounts, auto loans, and mortgages – there are actually a number of options that you can consider.
If you’re looking for something that will help your account mix without completely breaking the bank, it might be useful to learn more about the various credit account types that you can acquire over the course of your lifetime.
What Types of Accounts Can I Open?
There are three major types of credit accounts: (1) Revolving Credit Lines, (2) Non-Revolving Installment Loans, and (3) Open Accounts. Having multiple accounts in each category can help maximize your account mix score.
1. Revolving Credit Lines
These credit lines involve a different payment every month depending on your current balance. In other words, the amount you owe is subject to change and doesn’t have to be paid every single month in full. This means that credit can “revolve” from one month to the next – until you have time and/or money to pay it off. In the meantime, the credit will likely accrue interest.
Popular revolving credit lines include:
Credit cards. These are perhaps the most popular credit improvement tools among young graduates, who are looking for something low-risk that maximizes their control over their own credit score. You can also find revolving credit in the form of retail cards, which can belong to specific stores and corporations.
Home equity lines of credit (not to be confused with home equity loans). These lines of credit allow you to tap into the equity of your home. While these loans are generally easy to obtain, the amount is determined by how much you have borrowed or used from your credit limit. Since the interest on these loans is generally tax-deductible, home equity lines of credit are a popular way to give your score a boost.
2. Non-Revolving Installment Loans
These types of accounts include any loans that have a fixed payment for a fixed period of time. As with revolving loans, interest will be accrued each month and you are not required to pay the loan in full every month. Rather, you pay interest based on an APR (Annual Percentage Rate). This is where lenders make money from the sale.
Popular installment accounts include:
Mortgages. These generally require the most amount of paperwork during the application process, and you’ll need to bargain for a low-interest rate. Since mortgages last for a sizable period of time, you’ll want to avoid an interest buildup.
Auto loans. These loans are usually shorter than mortgages, but still involve a significant time commitment. They can be paid off in a period of four to six years, or longer – depending on the agreement you’ve made.
Student loans. These loans are used to pay for college expenses, and payments are deferred until students graduate and have regular paychecks with which to pay back their loans. Interest rates on student loans can be fairly harsh, and students aren’t given the ability to negotiate upfront. However, student loans can give your credit a boost if you make payments regularly.
Unsecured Signature loans. These loans are generally given by a bank or a credit union. The borrower will sign a form guaranteeing to pay the money back – but they are not required to specify what the money will be used for. It could be put toward home improvements, investments, or vacations.
3. Open Accounts
These accounts are the least common – mostly because they aren’t generally included on your credit profile. Open accounts are an odd mixture of revolving credit lines and installment credit lines. While they are required to be paid, in full, on a monthly basis – their payment amounts can change regularly. They also aren’t subject to interest rates, unlike installment and revolving credit lines.
Popular open accounts include:
Home utilities. This includes water, gas, and electricity. Since you use a different amount of utilities each month, your bill varies. However, since you don’t have to use your credit to apply for utilities, your payments aren’t credited on your report.
Open accounts can also include company charge cards and cell phone bills.
What is Secured and Unsecured Credit?
Beyond account types, you should also understand the difference between secured and unsecured credit accounts – which can cross the lines of all three popular credit line types.
Secured credit refers to loans or payments that are secured by an asset. This could include your home, your car, your furniture, or electronics. Anything that you’ve purchased that requires monthly payments can be repossessed as collateral for missed payments. This means that the line of credit is secure. If you don’t pay, the lender can simply take possession of the item back and sell it to someone else. This gets complicated with loans that involve depreciating items, however, because a company could still argue that they are losing money by attempting to resell the item. You could still be taken to court if there is a balance due after the asset is sold, as you are still responsible for the loan until it’s paid in full.
Another popular form of secured credit includes your utility and phone bills. Since a company can simply shut off your service for a missed payment, you may or may not be faced with legal action. The service will remain shut off until you pay your bill in full.
Unsecured credit refers to loans or payments that are not secured by an asset. This could include your credit card, retail card, or student loans. These loans generally have higher interest rates, because the lender suffers a huge loss when you default on your loan – or declare bankruptcy. These are higher-risk loans, and are sometimes more difficult to obtain at low interest rates because of their status as unsecured credit.
While you don’t have to keep tabs on your secured and unsecured credit to keep your account mix healthy, it still helps to know the difference.
As for other popular credit accounts (revolving, installment, and open), you should focus on obtaining at least one loan in each category. Nurture your loan until you’ve paid it off in full. Then, consider obtaining another loan in the same category.
This will improve your account mix which will, in turn, improve your score. It will also prove to lenders that you are using your credit in various different ways, increasing your likelihood of getting accepted for a loan that you really need.
Good luck!
