Understanding Different Types of Credit

Submitted by FreedomDM on Mon, 07/19/2010 - 18:48

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.

I have two charged off accounts from a credit card and I am enrolled to Lexington law but my credit score drop really bad. The customer representative at Lexington law told me that I have to get a prepaid credit card to improve my credit score. Do you think this would be a good idea to do so? I don't want to use a prepaid credit card in order to improve my score, however I can't get approved in anything like loans or non prepaid credit card. Is there any ways you can advice me to do to rebuild my credit without hurting me?

Fri, 07/30/2010 - 05:10 Permalink

I don’t know anything personally about Lexington Law but from what Ive read and heard it wasn’t positive. I did a search on “Lexington Law complaints” in Google and one post read: BBB processed a total of 278 complaints about Lexington Law Firm in the last 36 months, our standard reporting ...

Once an account is in a charged off status it remains as a negative on your credit for seven years, paid in full or not. Paying it through a program isn’t going to help your credit score but it’s always good to satisfy your debts and I congratulate you for taking the necessary steps to do so. Not everyone is or can be so proactive with their responsibilities, thumbs up!

They did provide you some sound advice. Getting a pre-paid or secured credit card is a good way to build your credit. Is there more behind why you do not want to use a secured card to build your score? Just trying to better identify your situation to further assist….I did it when I destroyed my credit and it really helped- was a long process, but helped nonetheless. I put $500 down with BOA on a secured visa. After a year of positive payments they converted the account to a regular visa and increased my limit to $1000. It’s been reporting positively and helping improve my credit ever since.

There are other great ways you can improve credit without using credit. Ive actually posted some articles regarding such in this forum. I can send you a link if you’d like.

Is there anyone you know and trust with good credit that would co-sign for you on a personal loan/line of credit?

This is the name of the article on our blog site, build-your-credit-without-using-credit. It was posted 11.2009. Im not sure what the forum rules are about providing links but if you go to our website you can get to the blog from there or just send me a personal mesg.

Hope this was helpful- feel free to ask anything anytime. Have a GREAT weekend and please be safe!

Fri, 07/30/2010 - 15:47 Permalink