What Are The Different Types Of Credit?

What will you learn

The 3 types of credit.

How each type of credit is used and repaid.

What is a credit mix?

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How Many Types of Credit Are There?

Knowing each type of credit, what it means and how it affects your credit are all important steps to mastering your credit!

Most people starting their credit repair journey are surprised to learn there are actually different types of credit. While credit is typically used to refer to an individual’s total creditworthiness in a general sense, there are also three types of credit accounts that are factored into your total credit score: revolving, installment, and open.

What Do I Need to Know About Each Type?

Each type of account varies in how the credit is accessed, as well as the repayment terms and penalties. Having multiple accounts and different types of credit accounts are ways to show creditworthiness to future lenders.

1. Revolving Accounts

A revolving account is credit in the form of an amount of money up to the established credit limit, or a total amount of credit that you can use until the balance is paid off. The most common forms of revolving credit are credit cards and personal lines of credit. When you apply for a revolving credit account, the lender will assess your credit score, credit history, income, and major expenses, like your monthly rent or mortgage payment. The lender uses these factors to determine if they will accept you as a customer and the total credit limit they will offer you!

What differentiates a revolving credit account from any other type of credit account is that the credit limit is available to the consumer indefinitely. As long as the account is paid in full, or at least the minimum payments are being met, you can continue to use as much of the available credit as often as you wish.

2. Installment Accounts

Installment credit, by contrast, is an established payment plan that includes the total amount of money borrowed as well as incurred interest and any other fees incurred when borrowed. All loans – whether home, auto, student, or personal – are types of installment credit where they are repaid in defined amounts, or installments.

An important distinction for installment accounts is that once the money is repaid to the lender, it is no longer available to the consumer. If you wish to borrow more money after you have repaid some or all of the balance to your lender, you will need to apply for a new loan to increase your available credit.

3. Open Accounts

Open Accounts are ones that must be repaid in full each statement and typically do not have interest charges. However, they typically have late fees and other penalties for delinquent accounts, such as service cancellation. Open accounts are typically utility and service providers like gas and electric companies, cable providers, as well as other service providers like cell phone and insurance plans.

In contrast to both revolving and installment accounts, open accounts are not consistently reported to credit bureaus, they do not typically appear on credit reports unless the accounts are currently past due or previously have had late payments. Service and utility companies are quick to report delinquent and past-due accounts, it is important to keep these accounts in good standing because they can have a negative impact on your score with little warning!

How Do I Know What Type of Credit Is Best for Me?

Having a mix of different types of credit accounts provides lenders with a strong sense of your creditworthiness. However, having a good credit mix is only one piece of the credit score calculation. It is more important to have fewer accounts in good standing than multiple accounts that you are struggling to keep up with minimum payments.

If you need help navigating building or repairing your credit, Credit Helpers can provide expert advice and help you become financially healthy once again. Dealing with delinquencies or other past-due accounts? Contact us today to see how we can advise you for your goals!

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