We sat down with Alexandra Erlich of Riverstone Law to discuss credit scores on our latest episode of the Community Partner Education Series. Over the last few weeks, we have been discussing some of the questions we hear when it comes to credit scores. One of the most common questions we hear is in regards to the different accounts that are taken into account when factoring a credit score.
There are four different types of credit accounts that are used in calculating a credit score. Each type of account is equally weighted at 2.5% of your entire score. We have found that having one type in each of these categories is best for your credit score:
- Mortgage Loan: If you haven’t ever owned a home before, this is obviously a hard type of credit account to get on your account. However, a mortgage payment is one of the greatest ways to indicate your creditworthiness, granted it is paid on time each month.
- Installment Loan: This type of debt has a fixed payment due each month and must be paid back over a set period of time. Examples of an installment loan include auto loans, student loans, business loans, home equity loans, personal loans, etc.
- Revolving Credit Line: These are your credit cards. A revolving credit line involves different payments each month, depending on how much you use that specific account. It’s a common misconception that the “type” of credit card — i.e., major credit card vs. a store card — is important, but it doesn’t matter if it’s a Visa, Mastercard, a department store credit card, or a gas station credit card. Any type of revolving account is crucial to have, and they are all weighted the same.
- Other or Open: This type of credit includes cell phone bills, utilities, etc. and are typically paid in full each month. These accounts won’t always be present on your credit report, depending on if the companies choose to report to the bureaus.
People with good credit tend to have a good mix of each type of account, and handle each account responsibly. The credit scoring models look to see if you are able to handle multiple types of accounts when assessing your credit. If you are working to establish credit, or are looking to repair your credit and are having a hard time finding somewhere to accept you, there are a few options to look into. One of those is a secured card. A secured card requires a cash deposit but it is a line of credit that is reported to the credit bureaus. So by keeping your balance low and making on-time payments, you can build your credit with a secured card. You can also look into a service like FingerHut, that will give almost anyone a line of credit, as long as you have not had a derogatory account history with them in particular.
Before opening any new account, or even closing an account, you should look at your entire credit picture and decide if it is the right choice. A small change can have a drastic effect on your score, so it is wise to check with a professional. If you have any more questions about your credit score, you can listen to the full podcast regarding this topic here, or reach out to Alexandra Erlich at Riverstone Law, or Cheri Landin at The Mortgage Co. We would be happy to answer any questions you may have.
Through all of my years in the banking and finance sectors I have found that there is one arena where skilled, knowledgeable and service minded professionals were few and far between: Credit Consultation and Restoration. After personally going through credit highs and lows over the years and working with countless companies I finally found the one that actually delivered on every commitment. Riverstone Law with the wealth of expertise and service impressed me to such a level that I sought employment with the company. I am so grateful to finally be in a position with a company that I believe in wholeheartedly and offering a service that I know without a shadow of a doubt everyone can benefit from. Every day excites me as I share my knowledge of the FICO and credit systems with all of the colleagues, professionals and their networks I have had the pleasure of working with for numerous years, now as I watch their pipelines, businesses, and incomes grow I am confident I have found my calling.