Types Of Credit
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 back later, each type of credit works slightly differently.
- Installment credit provides borrowers with a lump sum that they must pay back with interest over time following a set payment schedule. Examples of installment credit include auto loans and mortgages.
- Revolving credit enables people to borrow money on demand up to a predetermined limit, and they accrue interest on any money they don’t pay back each month. Examples of revolving credit include credit cards and personal lines of credit.
- Open credit is used to let people borrow money that doesn’t have a fixed monthly amount—like an electricity bill, which charges only for the power you actually use. Examples of open credit include utility bills and some cell phone plans.
Although every type of credit enables you to borrow money for various purposes, not all credit is treated equally in determining your credit score. Read on to learn how to use different types of credit to your advantage when trying to raise your credit score.
How the three types of credit affect your score
Getting a handle on the three different types of credit will help you make wise decisions when you’re trying to build your score responsibly.
Try out some of the following tips to use each type of credit to help improve your score.
On-time payment is important for every type of credit
Since payment history is the most significant factor in your credit score, it makes sense that paying on time each month will have a positive impact. Your installment credit and revolving credit accounts will show up on your credit report, so future lenders can see how often you’re making payments—or missing them.
While open credit accounts don’t usually show up directly on your report, missing enough payments could get your account sent to collections, which will definitely drop your score and leave a negative item on your credit report.
Types of credit to pay on time: Installment, revolving and open
Credit utilization depends on your revolving lines of credit
Another substantial part of your credit score comes from your utilization, which is a measurement of how much credit you have available and how much credit you’re using. This calculation applies to your revolving lines of credit, like credit cards.
In general, lenders like to see that you’re using around one-third or less of your available credit—otherwise, they could think that you’re at risk of not paying them back. For example, if you’ve got a total credit limit of $10,000 across all of your accounts, you may want to aim to keep your total owed amount around $3,000.
Types of credit to watch for utilization: Revolving
A good balance of credit types can help your score
When lenders view your credit report, they are encouraged if they find that you’ve used a variety of types of credit responsibly. 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.
When it comes to your score, revolving credit tends to have a larger effect. The reason for this is simple: unlike installment loans, which have predictable payments, revolving credit changes from month to month, so using it well means you’re likely on top of your finances. In any case, having a mixture of accounts in good standing will probably move your score upward.
Types of credit to include in your mix: Installment and revolving
Where can you find more information about your types of credit?
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 at least once a year.
Your credit report will list the balances and payment history for all of your accounts, including installment credit (student loans, auto loans, personal loans or mortgages, for example) and revolving credit (credit cards or personal lines of credit).
Most importantly, you’ll want to make sure that the information listed on your credit report is accurate. If your report contains mistakes—like incorrect balances or accounts you never opened—they could be affecting your credit score. Fortunately, you’re able to dispute these errors on your report by providing evidence to the credit bureaus. Often, it can be helpful to work with a credit repair company to get support with the dispute process.
Understanding the three types of credit can help you make better financial decisions and reach your credit goals.