When it comes to building credit, the numerous options in the lending marketplace can make the path to getting a good score a little confusing. Recently, a Credit.com reader wrote in with a question on what kind of accounts are the best for building credit.
Reader Question: I’m trying to strengthen my credit and I wonder if a gas card like Phillips66 or ExxonMobil card is a good idea? I don’t have any revolving credit cards in my credit file just Visa and Mastercard.
One immensely critical piece of the credit scoring puzzle that continues to baffle consumers, whether they have good credit or bad, is knowing what actions will either help maintain a good credit score or contribute toward rebuilding a poor one.
First, you may be surprised to know that you already have two revolving accounts: your VISA and Mastercard. ”Revolving” credit simply refers to any account where you are given a line of credit to use with the option of either paying your balance in full or making smaller payments each month, as long as a minimum monthly amount is paid. Other types of credit include:
- Installment loans, such as mortgage, auto and student loans, where the amount borrowed is paid back with fixed monthly payments over a set period of time
- Open (charge card) accounts, that don’t have an established credit limit and require the balance to be paid in full each month
While it’s not necessary to have more than one or two accounts to have a good credit score, it’s also true that a “healthy mix” of different types of credit demonstrates a wider range of credit experience, which can help your score.
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With that in mind, instead of applying for another revolving account, you may want to consider financing your next car, buying or refinancing a home, taking out a student loan, or obtaining a personal loan from your bank or credit union to strengthen your credit score. But don’t expect a huge increase, as the evaluation of your credit mix by the scoring formula only makes up about 10% of your score.
Of course, when it comes to credit scoring there is often a downside to even the most financially sound strategies. In this case, while the addition of an installment loan could help your credit score in the long run, you should also be aware that the immediate impact to your score from opening this or any new account is likely to be negative. That is, expect to see at least a slight drop in your score initially, as research into consumer credit behavior has found an increased level of risk among those who have recently taken on new credit. The good news, though, is that any such lost points can usually be regained within about six months of paying all obligations on time, keeping credit card balances low and not applying for any additional new credit.
What all of this means is that if you want to help your score in the long run, and are considering a major purchase, an installment loan could do the trick by improving your credit mix. Or if you’re reasonably happy with your two credit cards and are not overly concerned with maximizing your score, simply continue paying them on time each month, while keeping the balances down and holding off on any new credit applications. Either way, by managing your credit responsibly, you can achieve a good credit score based on whichever type of credit you use.
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