In my previous articles, I talked about the four components of a FICO score.
Length of Credit History
So, our only remaining component is:
Types of Credit Used--10%
There are two major types of credit.
Installment loans (also called a closed-end loan): car loans, student loans, etc. Mortgage is also a type of an installment loan, but it is reported separately.
Revolving loans: credit cards and lines of credit.
First of all, let me reiterate: this is the least important factor in the FICO credit score formula. Even if you have never had different types of credit, you can still score well with only a few credit cards under your belt if you use your credit responsibly. I don't currently have a mortgage--well, I used to, but even before I ever had a mortgage, my FICO score had been very good.
The reason I mention this, is that you shouldn't go ahead and get a loan just to improve your credit score. You should go ahead and get a loan if you really need a loan. It's really that easy!
Is this factor only about the mix of revolving and installment loans?
No, it is not. Different credit cards have different weight for your FICO score.
It might surprise you, but credit cards are not created equal in terms of how FICO views revolving credit. Store cards, for example, won't get you as many FICO points as regular credit cards. Now, store credit cards might be an excellent way to get discounts at your favorite merchant, but there is a catch (aren't there always?).
If you do not have a habit of paying your charges every month in full, you are in for a nasty surprise. A 25% or even higher APR is a common thing in a store card world, so even if you do carry a balance, always pay your store credit cards first or skip them altogether.
Of course, if you don't have access to regular credit cards, you don't have much of a choice anyway, and since getting a store card is relatively easy, it can serve as a way to build one's credit history.
If this component is so unimportant, then why does FICO still use it?
FICO does not believe that having or not having different kinds of loans can be an accurate predictor of whether or not you might default on your obligations, but they do believe it is helpful if you can demonstrate that you can handle all kinds of loans responsibly. So the point here is that it is good for you if you already have it, but it is not all that important if you do not.
But let's see what FICO has to say about it.
The FICO® Score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. 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.
The credit mix usually won't be a key factor in determining your FICO Score--but it will be more important if your credit report does not have a lot of other information on which to base a score. (Source: myfico.com)
This post concludes my Big FICO Score Breakdown series.
This is a post by Andy Shuman, a credit and travel expert who blogs at www.Lazytravelers.net. He writes and blogs during and between trips that he enjoys free of charge mostly due to creative use of credit card offers. He believes that credit cards are much more than just a convenient way to pay for a purchase, and that the benefits of responsible credit habits can go far beyond getting the best rates for loans and mortgages.
Andy is the author of bestselling books from Lazy Traveler Handbook Series available on Amazon. When he's not traveling, he lives with his beautiful wife and daughter in Brooklyn, NY.
Questions? Suggestions? Keep them coming!
Security Notice: All Applications utilize Secure SSL Technology for secure transmissions.
*See the online credit card applications for details about terms and conditions of credit card offers. Reasonable efforts are made to maintain accurate information. However all credit card information is presented without warranty. When you click on the " Apply Now " button you can review the credit card terms and conditions on the credit card issuer's web site.
Information in these articles is brought to you by www.123Apply.com. Banks, issuers, and credit card companies mentioned in the articles do not endorse or guarantee, and are not responsible for, the contents of the articles.
Advertiser Disclosure: The card offers that appear on this site are from companies from which www.123Apply.com receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). www.123Apply.com does not include all card companies or all card offers available in the marketplace.