Dec30
Diversifying your Credit to Build your Credit Score
Many consumers wonder what they need to do to build a solid FICO score. We all know that paying our bills on time and keeping our debts to a minimum is always a good idea if we want a strong credit score, but there are other things we can do bump up our credit score so we can qualify for the lowest interest rates on everything from home loans to credit cards.
Here’s how:
The three credit reporting agencies (TransUnion, Equifax and Experian) assess your credit worthiness by looking at a number of factors, including credit history, payment history and your debt-to-income ratio. However, they also look at how you manage different types of credit. If you are missing certain types of credit, your credit score will likely be lower.
Examining Different Types of Credit
In short, there are a number of different types of credit accounts that the credit reporting agencies take into consideration when examining your credit: credit cards, retail accounts, installment loans, home loans and consumer finance accounts. If you lack a home loan or installment loan, for example, the credit reporting agency does not have information to draw from and will therefore reduce your credit score slightly to account for this lack of information.
In other words, simply paying your credit card bill on time each month will not make a huge difference to your credit score over the long run. Installment loans are a great tool for raising your credit score, as they are steady, monthly bills that must be paid. In other words, if you pay on a car loan for an extended period of time, the credit reporting agency then has adequate information that details you are a good credit risk for installment loans and will therefore raise your credit score to reflect this.
Consider Adding a Small Installment Loan
Now this certainly doesn’t mean that you should seek other types of credit simply to raise your credit score. All it means is that it may take time to build your credit score enough to obtain the best interest rates on a variety of loans. However, now may be a good time to take a small installment loan on a kitchen appliance, for example, and make the steady payments instead of paying cash for it. The history of your payments will most certainly have a positive effect on your credit score.
