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3 Types of Credit

Finally, let's look at the three types of credit you can have. Overall, having these three types of credit only contribute about 10% or so to your overall score. Knowing what you have and how it affects your score is another step toward using your credit more intentionally instead of passively. As you will see, strong personal money management with a budget can help you manage each of these types of credit more effectively.

Let's start with the one type of credit that surprised me:

Open Credit

Open credit or open accounts are accounts that you accrue a balance in during the month that must be paid in full at the end of the month. Some examples are utility bills/accounts or your cell phone bill/account. These accounts usually don't charge interest either unless it is written into your contract as a penalty for late payment. They often are not reported on your credit report either unless as late payments.

This means that keeping up on your utility bills can be a positive force on your credit score. Ensuring that you always set aside the money for your utilities in a monthly budget can be a big help in that regard.

Revolving Credit

Revolving credit are the type of accounts that allow you to borrow continuously up to a set maximum limit. As you pay off the amount owed, that amount can be borrowed again, almost like a revolving door. Credit cards are likely your biggest instance of revolving credit. As you make payments on the principle owed on the card, you can continue to use the card for purchases.

One trap that people can fall into with revolving credit is not realizing how much of it they are using. As mentioned earlier this week, maintaining a consistent amount of available credit can help improve your credit score. Using a budget can help ensure you only put specific expenses on your credit card(s) and in limits that you can more easily pay off each month.

Installment Credit

This type of credit involves large lump sums of money that are paid back in fixed, regular payments or installments over a period of time. A mortgage is a form of installment credit. Car loans and/or personal loans are also installment credit accounts. Once the loan is paid back in full, the account is usually closed and no longer able to be borrowed from, unlike revolving credit.

Falling behind on your installment credit payments will reflect negatively on your overall score. Once again, having a solid budget to plan your installment payments into will help you stay current and help prove that you are responsible with what you have borrowed.

Having a mix of these accounts can help show the credit bureaus and lending institutions that you can borrow and pay back the accounts responsibly. This should reflect positively on your score in the long run.

Not sure how to build a budget to help manage these types of credit responsibly? Schedule a complimentary consultation with me today. Start living more intentionally toward your dreams instead of passively waiting for them to come true!

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