1. Types of Credit and their impacts on your credit score: Accounts for 10% of your credit score.
There are two basic types of credits: Open-ended (Revolving) and Closed-ended (Installment). Each type has a different effect on your credit score. They make up 10% of your credit score:
Open-ended Credit (Revolving):
Revolving Credit refers to a credit, up to a specified limit, made on a revolving basis for the purchase of products. Bills are issued monthly to the borrower for a total balance of charges which are usually a portion of the credit. The borrower has a choice to pay an amount from the Minimum Payment Required to the full Balance within a couple of weeks.
Credit Cards (MasterCard, Visa, American Express, Discover Card, etc.), Store Charge Cards (Macy’s, JCPenney, Sears, Gas Cards, etc…), are examples of Open-ended or Revolving Credits.
These cards usually carry a high interest rate and their lines of credits are not that high.
Credit card interest rates are controlled by the state of the card issuer, not the state you live in. Interest rates can vary widely. It is important to make sure you know what your interest rate is.
Closed-ended Credit (Installment):
Installment Credit refers to a credit for a specific amount, made for the purchase of a specific product, usually large items, such as: home, car, boat, etc. The payment period, number of payments and payment amount for each period are fixed. The borrower cannot pay less than the specified payment amount for each period. These loans usually carry a low interest rate and are for a longer period of time.
· Closed-ended Credit (Installment) payment history, especially car loans and real estate accounts have a more positive impact or weight on your credit score than Open-ended Credit (Revolving) payment history. Scoring models look favorably on Installment payment history. Having good Installment payment history on your credit report is essential. Try to have your name as a borrower or co-borrower on at least one of these types of accounts.
· Having a healthy mix of revolving credit and installment loans can positively contribute to your creditworthiness.
· Foreclosures and Short Sales in Real Estate and Repossession & Bankruptcy, in general, have major negative impacts on your credit score, much more than unpaid credit or charge card accounts. Try to avoid having derogatory accounts and work it out with lenders as much as possible.
Therefore, if you have (or could come up with) only enough money to pay your mortgage payment OR pay the minimum balances on your two credit cards this month, your first choice should be to pay the mortgage payment now and pay the credit cards later.
·· Don’t carry a large number of credit or store charge cards. Interest rates are high and scoring models look unfavorably on them. Credit card interest rates are controlled by the state of the card issuer, not the state you live in. Rates can vary widely, so make sure you know what your interest rate is. Some states, especially in the North East, have interest rates up to 30% or so. The maximum interest rate a credit card issuer in the state of Texas could charge is 18%.