There are a lot of guides out there that tell you to run out there and get new credit, but they don’t quite tell you how to do that or more importantly what type of credit you should get. The truth is that the type of credit you have matters for a few reasons.
First and foremost, when you go to apply for a car or a house, the lender wants to make sure that you have a well balanced credit history. If you’ve never had an installment loan before, they might feel like you can’t handle that type of loan because it’s a bit more long term than you credit card payments. This can be a valid concern, but you can overcome it simply by being smart and mixing up the different types of credit.
There are really three main types of credit around. The first type of credit that you might be familiar with are credit cards. These allow you to make purchases with someone else’s money (the credit card company’s), with the understanding that you will be paying back that money with interest. Credit cards are different from charge cards because you can repay the amount that you owe over time, which definitely helps you out.
There are also installment loans, which are just like credit cards except for one big difference: once you take out an installment loan, it’s for a set amount. You can’t pay off part of the installment loan and then use it for something else. Once you get the item that you seek, you have to focus on repaying the loan. Once it’s paid off, you can get another installment loan for something else. This is very different from credit cards, because once you’ve paid off part of your credit card line, you can get more credit. This is something that can make sense in certain situations. However, if you need to actually have a credit line, you should make sure that you have more credit cards than installment loans. Another example of an installment loan is a student loan — generally speaking, you just have to pay those off, though some students have found that they can get more loans if they need them.
You will need to think carefully about adding the other types of credit, like installment loans and even regular loans (that have variable rates). You don’t want to get in over your head just because they’re trying to build a more diversified credit history. Installment loans are nice because they are usually attached to something, like a car or a mortgage. It is possible to get both of these things with bad credit, but you’re going to end up paying a lot of money before you can refinance for better credit terms.
Mixing up your credit also gives you the power to raise your credit score. Believe it or not, the type of credit that you carry actually does make a difference.
You don’t have to rush out and get all three types of credit, but having them over time can really make a difference where it counts — why not get started today?