YFSCREDIT.COM – Day 11 – How To Improve Your Credit – Types of Credit

Hey Wealth Builder! Welcome back. On day 9 we covered the best way to improve your credit score by paying on time which is 35% of your score.

On day 10, we covered the best way to improve your credit score by improving your utilization which 30% of your score.

 Add it up.. Day’s 9 and 10 covered 65% of your credit score .

Remember, on a FICO scale we can earn 550 points. If we can earn it, that means if we work for it we can get it. So, by following what I told you to do in days 9 and 10, you can get closer to earning all of the available 357.50 points!

Today we’ll discuss how you can maximize another 10% or 55 points of the credit score algorithm and that’s types of credit or credit mix.

Let’s first define what types of credit or credit mix means to the credit scoring algorithm.

Well, don’t think about it too hard. I’m referring to the types of credit on your credit report.

Fico says the following:

FICO® Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. However, it’s not necessary to have one of each, and it’s not a good idea to open credit accounts you don’t intend to use.

To break it down for you there are only two main types of credit that you can have on your credit report. However, there are subcategories for each main category or credit type.

The two main types of credit you can have are:

Revolving
Installment

Now let’s break down the definition of each type.

What is revolving credit?
Revolving credit is the debt owed on an account that you can repeatedly use and pay back without having to reapply every time credit is used. Credit cards are the most common type of revolving accounts and weighed the heaviest.
What is installment credit?
Installment credit is a debt that is paid at regular times over a specified period. Examples of installment debt include most mortgages, auto loans, personal loans, credit builder loans and student loans.

With the definitions out of the way let’s discuss what I call

…The Holy Grail Mix

I noticed that once I had this mix of credit on my profile, my credit score was able to rise very quickly. The Holy Grail Mix is why I have a perfect credit score today!

You want to have at least 3 to 5 revolving accounts. I recommend the following (click the buttons):

You want to have at least three installment accounts (3 of any below. Listed in priority of highest to lowest)

Mortgage
Student Loan
Auto Loan

 

Naturally, you might have a few questions now.

Such as.

Why is this the perfect (Holy Grail) mix?

Well, it covers all basis that FICO needs to consider you a low credit risk and has 8 data furnishers reporting every month that you’re paying on time.

Why more revolving accounts over installment?

Well, revolving credit is weighed heavier than installment credit. Installment accounts directly impact paying on time, whereas revolving credit impacts paying on time and utilization.

Here is the thing… Even though student loans, auto loans, and mortgages are in the perfect mix formula. You never want to get an auto loan, student loan or mortgage in the hopes of improving credit.

You only should obtain installment loans when there is a definitive need! Why? Since installment loans only impact the paying on time category, it will require you to pay on time for six months to a year before seeing the benefit of the installment loan.

Also, installment loans often require you to pay for something for several years (For example a five-year auto loan or 30-year mortgage).

You only want to get an installment loan if it fits your financial plan.

For example, it took 1 year for my credit score to recover from my mortgage and 8 months from my auto loan, but my credit cards made my score increase immediately!

I said this earlier, but I want to repeat it! Why more revolving accounts over installment? Well, revolving credit plays a bigger role in credit increases than installment credit. Installment accounts directly impact paying on time (35% of your score), whereas revolving credit impacts paying on time and utilization (65% of your score).

So you also might be wondering “Why those particular credit cards?” Well, I’ve done my research and identified guaranteed approval credit cards for any credit level. If I was starting over and I needed to improve my credit score the fastest within one year, this is exactly what I would do.

Today’s action items are simple. Review your credit report to determine do you have the Holy Grail Mix!

If you do not have the Holy Grail Mix as discussed above write down when you will make this happen

 

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