Having multiple credit products in your name (such as a few credit card accounts and a mortgage or car loan) can help strengthen your overall credit profile. These credit products fall into two main categories: temporary loans and installment loans. Lenders want to see that you have both because it shows them that you can handle the many different responsibilities that come with borrowing any type of debt. Although the two types of credit are different, one is better than the other when it comes to improving your credit score. Regardless of your balance, interest rate or even credit limit, a payday loan is a much better reflection of how you manage your money than a payday loan.
REVOLVING VS. INSTALLMENT CREDIT: WHICH SHOULD ONE HAVE?
Having both a payday loan and a payday loan are important to maintaining a good credit rating, but the payday loan is usually more important than the other. Installment loans (student loans, home loans and car loans) show that you can repay the borrowed money continuously over time. At the same time, credit cards (revolving debt) mean you can take out different amounts of money each month and manage your personal cash flow to pay it back. lenders are much more interested in your revolving credit accounts, says Jim Droske, CEO of Illinois Credit Services. While you may have a large car loan of over $20,000, lenders will take a much closer look at your credit cards - even if you have a very low credit limit. "Assuming both obligations are always paid as agreed, a credit card with a $500 limit can affect your credit score more than a $20,000 car loan," Droske tells CNBC Select. It is important to pay both bills on time each month because on-time payments account for 35% of your credit score.
But only credit cards show whether you are a reliable customer in the long run, he explains. Because your balance is constantly changing, credit cards show how well you plan ahead and prepare for changing expenses. "Credit scores predict future behavior, so scoring models look for clues in your good and bad history," says Droske (who has a perfect credit score). With a credit card, your balance can be as low as $1,000 a month and then three times the following month. If your track record shows that you manage your money consistently enough to cover variable expenses, lenders know you're likely to be reliable enough to borrow more money in the future.
WHY ONE SHOULD LIMIT THE REVOLVING CREDIT !
1. Higher interest rates Interest rates on overdrafts are usually higher than on loans. If you don't pay your account in full every month, the interest can cause a lot of problems.
2. Usage fees Some credit accounts have annual fees. Some may charge an account setup fee or other fees.
3. Bad Credit Score and Debt If you don't pay your bills on time and in full and spend more than you can afford, your credit score can drop and you can end up in debt.
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