Your credit, as you know, is an important piece of your financial puzzle. Your credit provides insight into how you can be expected to use money in the future. Financial services companies and lenders alike look at your credit history to decide on everything from what interest rate you should pay to how high your insurance premium should be.
A credit score is a reflection of the information in your credit history, so it makes sense to pay attention to the information in your report. One of the items to be aware of is how the type of credit you have can influence your credit score. Not every loan is weighted the same; the types of loans you have matter.
Mixing It Up: Revolving and Installment Loans
First of all, your loans are divided into revolving loans and installment loans. A revolving loan is one in which you are given a limit, and you can continue to borrow as long as you pay down your balance. Credit card and home equity lines of credit are examples of revolving loans.
Installment loans, on the other hand, are those with a set length of term. Your car loan and your mortgage are examples of installment loans, since you pay off the obligation over time, with set payments. If you want to borrow more, you have to re-apply for another loan.
A credit history that includes a mix of installment loans and revolving loans is considered better than a credit report that is overly weighted with one type of loan.
Where Did You Get Your Loan?
It’s also important to consider where you get your loan. Subtle shadings in the algorithm used to figure your credit score include the source of your loan. A credit card from a major bank has a more positive impact on your credit score than a credit card issued by a department store.
Likewise, you will find that a payday loan can have a slightly negative impact on your credit score in a way that a car loan from a reputable lender doesn’t. This is because someone in a solid financial position rarely gets a payday loan. If you have a payday loan, title loan, or some other similar type of loan on your credit history, the assumption is that you are in a precarious position as it is -- and you could default on a loan from a lender considered more reputable.
Before you apply for credit, think about the type of loan you are getting, and try to focus on loans that will help your credit situation.