Do You Know Which Loan Types Benefit Your Credit Score?
Posted on April 6, 2011
When you are attempting to improve your credit score and repair your credit mistakes from the past, there are certain loan types that can help the process. Part of the requirement for having excellent credit is the type of loans you have as well as how you manage those loans on a consistent basis. Your credit score will also benefit from having a variety of loan types. The more diverse your background, the better it is for you.
Why Do Loans Help?
Your credit score is a reflection of how you manage your credit, bill payments, and limitations of credit. While it seems counterproductive that the more loans you have the better your credit will benefit but it genuinely is the case when it comes to personal credit.
The logic behind this is that the lenders want to know you have the ability to juggle multiple account types and terms without problems. This ensures them you will be less likely to default on repaying their loan since your history shows strength when it comes to monthly obligations. Your ability to handle multiple account types also helps lenders to understand you are financial stable enough to see through your commitments.
What Kind of Loans Will Help?
A basic rule of good credit is to never have too much of one thing. For instance, you can have a great credit history payment-wise but if you only have 5 credit card accounts and nothing else, you lack the diversity necessary for a higher credit score. This is why it is important to maintain several types of accounts including:
- Mortgage – Provided you have kept up to date on all of your monthly mortgage payments, a mortgage is usually a top-notch reference to have on your credit report. Mortgages are typically the largest loan type a consumer will obtain in their lifetime so the total amount of the money loaned in addition to your ability to stay current with all payments can mean a lot to a creditor or other lender. Additionally, real estate generally goes up in value which adds to your overall assets.
- Vehicle Loan – Vehicle loans are a good resource for a credit score boost. If you got the loan when your credit was excellent, you likely have a good interest rate. While a vehicle does generally tend to decrease in value over time, you still have added an asset to your finances.
- Personal Loans –This may be a good resource people will use to bump up their credit score a few points. Credit unions and smaller community banks are often the best place to apply for a small personal loan, especially for credit boosting purposes.
- Credit Cards – when used wisely, credit cards can be an ideal way to continually boost a less than perfect credit score. As long as the credit card provider reports back to all three credit reporting agencies, all you need to do is keep balances low and pay off the full balance each and every month to see results.
If you are lacking in any of these loan types, it is worth considering cleaning your credit history up enough to qualify for additional loan types. Obviously it’s not wise to apply for something you will not be able to manage financially but with proper budgeting and tight control over spending you can make these loans work to your definite advantage rather than work against you and your credit score.
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