Types of credit: What they are and how they affect your score

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There are three main types of credit: installment credit, revolving credit and open credit. Each can affect your score positively or negatively depending on your credit mix, credit utilization and on-time payments.

You probably know what credit is, and how to read a credit report or credit score ranges. But did you know that there are different types of credit that can affect your score? Each credit type has its own payment expectation, interest rates and other predetermined factors that regulate how it is used and by whom.

With almost 10 years of experience, CreditRepair.com knows how important it is for our more than 950,000 customers to receive guidance on credit mixing, utilization and credit repairs. We know that when you’re establishing your credit or trying to reach a good credit score, it’s not enough to simply check your credit score or report — you need to know the different types of credit and what they do, too!

What are the three types of credit?

The three types of credit are installment credit, revolving credit and open credit. Although all credit lets you borrow money and pay it back later, each type of credit works slightly differently.

1.    Installment credit

Mortgages, auto loans, student loans and personal loans are all examples of installment credit. This type of credit usually means you will pay back the total amount in installments and provides up-front details concerning interest rates, length of payment and monthly fees so you’re not surprised about how much you owe each billing period.

2.    Revolving credit

Thinking about applying for a new secured credit card or line of credit? If so, you’re considering using revolving credit. This credit type enables people to borrow money on demand up to a predetermined limit and then accrue interest on any money that isn’t paid back each month.

3.    Open credit

If you’re looking to borrow only the money you need to pay particular bills, consider using open credit. You don’t need a fixed monthly amount in order to borrow money with this type of credit.

For example, open credit is great for some cell phone plans and utility bills, like electricity bills, because they only charge you for what you actually use. Plus, open credit also includes unsecured credit cards and some credit lines, so you have a variety of credit options available.

 Installment creditRevolving creditOpen credit
Are there credit limits?YesYesYes
Is there a fixed monthly rate?YesNoNo
Are there interest fees?YesYesYes
Is there a fixed repayment term?YesNoNo
ExamplesMortgages, auto loans and student loansSecured credit cards and lines of creditUnsecured credit cards and lines of credit

How do the different types of credit affect your score?

Each type of credit can affect your score in positive or negative ways, even when you’re not consciously thinking about maintaining a good credit score.

We get it—remembering to pay your bills, reimburse a loan and stay on top of your credit card statements is enough as it is. However, we also know that it’s important to consider how each type of credit can impact your credit score before applying for them.

  • On-time payments: Lenders need to see how often you’re making payments—or missing them—so your installment and revolving credit accounts will show up on your report. Missing payments could get an open credit account sent to collections, which may leave a derogatory mark on your credit report that lenders will also see.
  • Credit utilization: Credit utilization is the measurement of how much credit you have available and how much credit you’re using, often referring to revolving credit. Many believe that keeping your credit utilization under 30 percent is ideal, but it’s more important to make on-time payments and stay within your credit limits.
  • Credit mix: Using a variety of types of credit responsibly can show lenders how well you manage your credit and even improve your score. Different types of loans as well as a balanced load of revolving credit can signal that you’re responsible regardless of the kind of credit you’re using.
  • Credit building: All three types of credit can impact or help you build credit. Paying back certain bills, investing in different credit types and staying diligent with payments can help you establish credit accounts you can afford, keep control of and expand in the future!
How different types of credit can affect your score

What is the best credit type to have?

The best credit type to have is actually a mix of all three types of credit. Having some form of installment credit, open credit and revolving credit shows lenders that you can responsibly manage a variety of credit types and will help your credit score. Additionally, this can also indicate that you may be able to handle larger loans.

While having a mix of credit is important, you shouldn’t start applying for a ton of different credit types immediately. This may be tempting, but applying for various types of credit in a short amount of time will rack up hard inquiries against you, which can drop your credit score. Plus, many hard inquiries can stay on your credit report and affect your credit for multiple years. It’s best practice to apply for credit only when you need it.

Where can you learn more about the types of credit?

You can learn more about the types of credit you have on your credit report. If you’re using any kind of credit—installment, revolving or open—you’ll want to get a free copy of your credit report from each of the three credit bureaus (you can get these copies at Annualcreditreport.com). These reports can give you a better understanding of your credit and how each type affects your credit score.

Your credit report lists the balances and payment history for all of your accounts, including installment credit and revolving credit. You’ll also be able to see any credit inquiries and their impact on your credit. This is good information to keep in mind if you ever consider applying for additional credit cards or other credit types.

Understanding the three types of credit can help you make better financial decisions and reach your credit goals. By investing in your own credit education, you can learn more about what the credit types do, why your credit score matters and how to improve or fix your credit.

Note: The information provided on CreditRepair.com does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only.

Written by Makeda Jackson

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Makeda Jackson has worked as a credit professional with the CreditRepair.com team for the last few years. Her goal is to continue the fight for everyone to have a fair, and accurate credit profile and for a chance at a better quality life. Her biggest achievement comes with the success of the hundreds of credit advisors that she has had the pleasure of educating. Her commitment to integrity and valuable service is extended out to both CreditRepair.com customers and to the people in her own team. Outside of work, Makeda loves to do outdoor activities, spend time with her family, and volunteer with her team for charity events.

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