In order to clean up your credit report and maximize your credit score, you need to understand the types of accounts that are collected by the credit bureaus. There are two categories of accounts that appear on your credit report: installment loans and revolving credit. If you’re looking to improve your credit score, you need a healthy balance of both.
Installment Accounts Explained
An installment account is one where you have fixed payments for the life of the loan. Some types of installment loans have payments that are amortized, and will likely be interest-heavy in the beginning and principal-heavy in the end.
Examples of Installment Accounts
Types of installment accounts typically include:
- Auto Loans
- Credit Building Loans
- Home Equity Loans
- Mortgage Loans
- Personal Loans
- Signature Loans
- Student Loans
Auto loans affect your credit score in a few different ways. For one, you’ll see inquiries for auto loans appear in the ‘Requests for Your Credit History’ or ‘Inquiries’ section of your credit report. Secondly, when you make payments, they’ll be noted by the three credit bureaus.
If you are up-to-date with your payments, it will say current on your credit report as opposed to delinquent. Fall 30 days behind, and not only will you have a delinquency noted on your report, but you’ll also be in danger of having your car repossessed.
Credit Building Loans
This type of loan isn’t offered by every lender. It’s a little unique in that it’s only purpose is to help you build a better history with credit.
The gist of credit building loans is that you deposit a set amount into a savings account, and over time, you make payments to equal the original amount. Once you do, you get back the money that you initially deposited. Depending on how long you do it, the amount you deposited should have built up interest while you were making payments
Home Equity Loans
A home equity loan is a fixed amount of money that you borrow, which is secured by whatever amount of equity you have built up in your home. Amounts vary, but lenders typically allow you to borrow as much as 75% to 90% of whatever equity you have accrued. Like other installment loans, you make fixed payments each month on the loan until it is paid back in full.
A mortgage is either given out by a credit union, bank, or lending company that specializes in helping borrowers finance the purchase of a house. To get a good rate on your mortgage, you need to have a good credit score and have a positive history with debt. Borrowers can typically choose between 15, 20, or 30 year repayment periods.
Personal loans are given out by banks and credit unions, and generally have a repayment period of two to five years. Most personal loans you will find are usually unsecured, meaning you don’t have to use your house or car as collateral.
There are government student loans and private student loans. Depending on which one you have, payment is usually deferred until after graduation or when there is a change in enrollment status. This is unique compared to other loans, and is meant to give student borrowers enough time to find a full-time job before making payments.
Should you open an installment account to improve your credit score?
When it comes to loans, you should only ever take out a loan when you need it. Never go into debt to build your credit score. The main reason you want a good credit score in today’s world is so you can borrow money one day with a good rate. Taking out a bad loan so that you may one day take out a better loan puts you at too much risk.
If you need the money, and you make your monthly payments on time, installment loans will further strengthen your credit score.
Revolving Accounts Explained
A revolving account is one where you can borrow money as you need it, but there is a limit to how much you can borrow. You have to make monthly payments on any amount you use, and there is usually an interest charge if you carry a balance from one statement to the next.
Examples of Revolving Accounts
There are three types of revolving accounts that will likely appear on your credit report.
- Credit Cards
- HELOC (Home Equity Line of Credit)
- Personal Line of Credit
A credit card is issued by a lender and allows the account holder to borrow money to make purchases. If you pay back the money within a certain period of time, you don’t have to pay interest on top of the amount you used. Many people consider carrying credit cards safer than carrying around a lot of cash because credit cards can be cancelled if they are stolen.
Used wisely, credit cards come with a lot of perks — they can build your credit history and may even come with points that can be redeemed for other things.
Home Equity Line of Credit (HELOC)
A home equity line of credit allows you to borrow against the equity you have accrued in your home. Depending on how much equity you have, HELOCs are preferable to many people over credit cards because the credit limit can potentially be much higher than most credit cards.
HELOCs also tend to have lower interest rates than credit cards, making any amount you borrow easier to pay off over time. Depending on the lender, you can borrow up to 75% to 90% of your equity (but 80% is the norm). The downside to HELOCs is that your home is used as collateral. Should you not make payments, the lender can take your house from you.
HELOCs can be good for your credit if you make your payments on time, and will also likely benefit your credit utilization ratio.
Personal Line of Credit
A personal line of credit is a loan that you can use like a credit card (much like a home equity line of credit). You pay interest only on the amount you use. It’s a good option for people who need to borrow money incrementally, but don’t like the interest rates and credit limits that apply to credit cards. Because it is unsecured by any form of collateral, personal lines of credit usually have higher interest rates than HELOCs. To get a personal line of credit, you usually need to have a minimum credit score of 680, but every lender has its own requirements.
Should you open a revolving account to improve your credit score?
Opening a revolving account is a practical way to improve your credit score. Just be sure to pay off your balance each month so you don’t have to pay high interest rates.
DON’T use credit cards to make large purchases you don’t need, however, to boost your credit score. As with installment accounts, it is not a good strategy to go into debt to strengthen your credit report and score.
What types of accounts don’t show up on credit reports?
The following may require you to make monthly payments, but, unfortunately, don’t show up on your credit report. The exception is if you become delinquent on your account and it’s sent to collections.
Using Rent and Utilities to Increase Your Credit Score
If you would like your rent to appear on your credit report, there are rent reporting services on the market. They usually come with a sign up fee, as well as monthly fee; however, if you haven’t established a credit history yet, this is a good way to begin doing so.
As for utilities: Experian currently offers a service called Experian Boost, which can get you credit for on-time utility payments. Just keep in mind that most lenders look at all of your credit reports, and not just the one with the best score.
Does your bank account or savings account appear on your credit report?
Your bank account and your savings account also don’t affect your credit score.
Regardless of how much you make and how much you have saved, neither FICO nor the three credit bureaus collect and store that information. A hefty savings and solid monthly income will affect how much you can borrow should you use the money as a down payment, but they won’t contribute to a stronger credit ranking.
However, FICO did come out with a new product called UltraFICO this past year that actually does take your bank and savings account into consideration. It’s not universally recognized by lenders at the moment, and you have to sign up for it, but don’t be surprised if it plays a larger role in the future.
The Bottom Line
As you can see, understanding credit reports doesn’t require a college degree in economics or accounting. All it requires is a quick five minute read. Now that you know what’s showing up, you can truly begin strengthening your credit score.