Different Credit Types and How They Affect Your Score
Posted: Monday, October 24, 2016
While there are multiple types of consumer credit scores, there must also be multiple types of credit. Understanding that not all credit is the same is a good way to learn how to maintain a credit report that is in good standing. You must carry a variety of credit to have good credit. In other words, if you only have a few credit cards on your report, even if you make all of your payments on time, your credit score won’t be excellent.
One of the distinguishing factors of credit is whether it is a revolving on non-revolving account. Revolving credit is similar to a credit card where a lender issues you a credit limit which you can use at any time to make purchases. If you are responsible and make regular and timely payments on your revolving line of credit, the lender may increase your line of credit. There is no set monthly payment on a revolving line of credit but there is an assigned interest rate that will continue to accrue until you pay off your entire balance. As you pay down your balance, the funds become available again for you to borrow again and you can continue to use the credit until you reach your maximum credit limit.
Non-revolving credit is similar to revolving credit in that a credit limit is established and the money available can be used to make purchases. Monthly payments are made towards the balance and interest. However the main difference is once the balance is paid off, the funds are not made available again. Examples of non-revolving credit are mortgages, auto loans, and student loans. These types of loans are designated for a specific purpose and the funds cannot be used for anything else.
A second distinguishing factor of credit is whether it is secured or unsecured. Secured credit is a loan that is backed by an asset such as a savings account, home, or automobile. These assets are used as collateral on the credit and, if you fail to make payment, the lender is entitled to recover your assets to pay off the debt. This type of credit is considered lower risk for lenders because if you default on your loan the lender is able to recover their funds.
Unsecured credit is higher risk for lenders. This type of credit, like a credit card or store card, does not require any down payment or collateral. If you fail to make payment, you will accrue interest and owe more money than you spent and a lender will be required to come after you personally or with a collection agency to collect on the debt.
A third factor of credit is whether the loan is short or long term. Short term loans must be paid off in a short period of time. An example of a short term loan is a pay day loan. These types of loans are high risk for both the lender and the borrower. Short term loans have extremely high interest rates which if you default on, you can find yourself owing an enormous amount of debt.
Long term loans, have a designated amount of time, such as a 30-year fixed mortgage loan. This type of credit has lower and more desirable interest rates as the life of the loan lasts over a longer period of time.
Maintaining a variety of positive credit accounts on your report will ensure you have good credit and you are eligible for all types of credit. If you are in need of assistance with your credit report and would like the advice or assistance of counsel, contact SmithMarco P.C. for a completely free case review.