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Credit Score Factor: Types of Credit

The variety of credit lines and loans that you have can actually change your credit score.

One of my wife’s resolutions for us this year was to get our credit in order, and I’m happy to say that we’ve made progress. We both reviewed our reports and we signed up for a free credit monitoring so we can track our scores. Unfortunately, once I started looking at my account, I realized I didn’t know the first thing about how credit scores are calculated. So I started to do some research. Now I understand that different factors affect my score, but what I am not sure of is the part about having different types of credit. I know it’s only 10% of the score calculation, but that’s big enough to make a difference.So what does “types of credit” mean and does it mean I have to have a mortgage, a student loan, a car loan and a credit card if I want excellent credit?

Jason K from Tulsa, OK

An expert answer from Adam Silverman

Hi Jason,

Wow – it’s August and you’re still sticking to your New Year’s resolution? That alone is pretty phenomenal. Now on to your question…Yes, “types of credit in use” is one of the five factors that go into your credit score calculation. It’s one of the two smallest factors (the other is “new credit applications”) and they each only carry 10% of the weight in determining your credit score. You’re also right to assume that just because that’s a small percentage, it’s still enough to mean the difference between a good credit score and a fair credit score when a lender goes to check your credit. So even though it’s not the biggest factor, it’s still important to understand.

Types of debt and credit plays a key role in your credit score

“Types of credit” refers to the types of debt and credit lines that you currently hold. This is a factor in calculating your credit score because it shows that you’re experienced in managing a diverse range of debts.

This is important to creditors and lenders, because having a diverse portfolio with the right types of debt means there’s a better chance that you’ll pay them back.

Now this doesn’t mean that you have to have some kind of Noah’s Ark of debt in your portfolio – you don’t need two of every kind or even one of every kind. That’s not the point. However, your credit profile should show some diversity; otherwise, you may run into problems. For instance, if you only have credit cards and you go apply for an auto loan, it might raise a red flag for the lender that you’ve never dealt with that type of debt. That may make you more of a risk in that particular situation.

At the same time, certain lines of credit look good on your credit profile, while others are less attractive. For instance, a mortgage is usually considered a good type of debt to have as long as it’s current. Every consumer has different scores – the three credit bureaus each have their own score, FICO has its own and even individual creditors and lenders may have their own way of calculating your score. So the score that a lender or creditor checks may not be the score you see on your monitoring service. They may weigh the five factors differently or use different factors altogether.

Adam Silverman
Certified Credit Counselor

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