Understanding Different Types of Credit

Taking charge of your credit starts with understanding the four different types of credit, how they work, and how they affect your credit score. Establishing an educated position on different types of credit will enable you to make smart financial decisions and aid in deciding what steps you can take to improve credit. The better the credit score, the better the financing rates when purchasing a new home or automobile.

Utility credit is one of the most common types of credit. Electric, gas, and phone companies issue a line of credit to consumers. Utilities are not paid in advance. The service, or energy, used is tallied and due after it has been used. Because of this system most utility companies require a deposit when establishing an account. They also charge late fees and can report late or unpaid accounts to the credit bureau. What they do not do is report your positive payment history. So you basically get no kudos for paying your utilities on time but will be stricken with a negative mark if not paid in accordance with the terms.

If you have a mortgaged home or a student loan you’re probably familiar with loan credit. An application qualification process begins the steps to obtaining a loan. Banks and lenders have strict guidelines to ensure the loans they approve can be paid and will not default. Obviously this isn’t the case in every instance but remains to be the foundation in establishing lines of credit. A good credit score can greatly increase your chances for being approved for a line of credit. The better your credit rating the better the interest on the line of credit. Timely payments are usually reported to the credit bureau to help improve credit. Missed or late payments over 30 days are reported negative and can cripple your good standing very quickly.

If you have ever purchased a car or major appliance and made small monthly payments towards the total balance you have utilized installment credit. The interest or finance charges for this kind of credit are built into your monthly payments. Paying the debt timely will improve your credit score over time. Payment history accounts for 35% of your credit score. It’s the largest factor in the credit score formula.

Basic plastic lands in last place. Credit cards enable consumers to spend money they do not have and offer payback plans with minimal payment requirements and high interest and finance charges. Like other types of credit, rates vary based on the consumer’s credit history. Penalties and fees come in many forms and fashions and can be applied without notice. Late payments are reported to the credit bureau, dropping your credit score dramatically. Your score goes down a lot faster than it goes up. Missing payments is the most common reason scores drop. Spending more than 30% of the available credit will also impact your credit negatively and lower your credit rating. That means if you are approved for a Visa card with an available credit line of $5000 spending more than $1500 of that $5k will drop your score. High interest rates and small payment requirements create a payment cycle that maintains a good credit rating but never pays back the debt.

You can pull your credit report once a year to see what types of credit you have and how they are affecting your credit rating. Its always a good idea to run your credit at least once a year to make sure there aren’t any fraudulent charges and that you have not become a victim of identity theft. Websites like annualcreditreport.com provide free credit reports for consumers once yearly. A certified credit counselor working with a nonprofit organization will provide a free financial analysis and credit report review to consumers who want a professional and definitive review of their credit report and financial portfolio.

Non profit counseling services can eliminate debt and improve credit.