What are the different types of credit?
The variety of credit lines and loans that you have can actually change your credit score.
Wow – it’s almost the end of the year 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 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. 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.
Best of luck,
Jeffrey Schwartz is the Executive Director of Consolidated Credit Counseling Services of Canada and President of the Credit Association of Greater Toronto (CAGT).
If you have a question about a debt management program or just about finance in general, Jeff is here to help. Send us an email with your question to AskJeff@ConsolidatedCredit.ca. You’ll get the expert advice you need and your question may be featured here on our website.