Did You Know There Are Different Types Of Credit?

Tuesday, June 29th, 2021
woman with dark hair and blue sweater thinking holding credit card

When you think of credit, you likely think of borrowing money from a lender or getting a card. But, there are actually three different types that are used to calculate your score. It is important to understand the similarities and differences between them and how they can affect your score.

Revolving credit

This type of credit is provided by lenders at certain amounts. It can be used almost freely, as long as minimum payments are made on time and the account remains open. Credit cards are the most commonly used form of revolving credit. Home equity loans are also included in this category, although you are borrowing on the value of your home.

The initial amount your receive from a lender will depend on what you qualify for and the lender. Once you have made a purchase, the amount you have leftover will be what you have for the remainder of the billing cycle. For most cards, a billing cycle is one month.

Installment credit

This type of credit refers to loans that are given at specific amounts that MUST be paid off by a certain time. Payments are set at specific amounts, although many times you can pay more than the agreed amount. Common examples of this include home, car, and school loans.

To use this type of credit, you must first qualify for a loan and then sign a contract. There are strict rules for paying off this type of debt, including when you pay and what happens if you pay late. Also, keep in mind that you will most often pay interest with installment credit.

Open lines of credit

This type of credit is a combination of the other two. Billing periods are set while the payment amount can change. Another difference is that the entire balance is due at the end of the billing period. Utility bills are a great example of open credit.

Charge cards are another example of open credit, but they work slightly differently than your utility bills. There is a fluctuating limit on the card that varies depending on factors such as your spending habits, your score, and your payment history. Like a utility bill, the amount you spend must be paid off at the end of the billing cycle.

How do these types of credit affect your score?

The two main scoring models for credit are FICO and VantageScore®. FICO focuses on five areas: payment history, how much you owe, how long you’ve had debt, credit mix, and any new debt. VantageScore® uses six factors. All of these vary in “importance.” Here are three examples of how FICO scoring works.

Your history length (15%): FICO uses this from all three types of credit. With installments, accounts close once payments are completed, so it can help to have an open card at all times. It is good to use it every so often and make your payments, even if it isn’t for a lot.

New credit (10%): Although this doesn’t take up much of your score, lenders still like to see this information. If you are getting too much debt at a fast pace, to them it likely means you aren’t doing well financially or that you are not responsible.

Payment history (35%): This makes up the largest part of your score. Lenders want to see that you are able to make consistent, on-time payments. All types of credit will report on this, so be sure to make at least the minimum payment on time every month.

Do you need help with credit?

Building or repairing credit can be difficult if you don’t know where to start. If you would like to learn more about the different types of credit and how scores work, a financial institution can help! At Borger Federal Credit Union, we are dedicated to helping members succeed financially. You can reach us at (806) 273-9506 or Send Us an email to learn more about becoming a Member and getting help with financial education.