Types of Credit and How They Affect Your Credit Rating

If you want to take charge of your credit, you need to understand how the four different types of credit work, and how they affect your credit rating. Knowledge is power, especially when it comes to your finances. Understanding the four types of credit will allow you to make smart financial decisions and build your credit rating. A good credit rating will help you get the things you want, like a new house or car. The life of your dreams starts when you fully understand how credit works.

The first type of credit is service or utility credit. Almost every individual uses this type of credit. When you open an account with a utility company, such as an electric, gas, or telephone company, you are given a line of credit. You do not pay your utilities in advance. You pay for the energy or service that you use the month after you use it. Most utility companies require that you pay a deposit. If you make a late payment, you could face a late charge. Most utility companies do not report your payments to the credit agencies unless they are delinquent. This means that paying on time does not help your credit rating, but if you pay late, your score will suffer.

The second type of credit is loan credit. You use this type of credit if you have a mortgaged house or a student loan. You usually have to apply to see if you qualify for a loan before the bank or lending agency will give it to you. A high credit rating greatly increases your chances of getting a loan. Paying your loans on time keeps your credit score high.

Installment credit is the third type of credit. If you have ever purchased a car or a major appliance and paid a little of the cost each month, you have utilized installment credit. The finance charges for this type of credit are usually built in to your monthly installment payment. Paying your debt back on time will help your credit score. If you do not make your monthly payments, your credit score will plummet. Some lenders penalize you for paying back the debt early.

Finally, credit cards are the forth type of credit. Credit cards allow you to use your card to pay for any item. Your finance charges can vary based on how much you use your card and whether or not you pay your credit card bill on time. If you pay off your full balance each month, you might not be charged any interest at all. Unfortunately, most individuals charge more on their credit cards than they can pay off immediately. Having a high credit card balance does not necessarily mean that you have a bad credit score. As long as you are servicing your debt by making the minimum payment on time each month, your credit score could be quite high. If you skip payments or pay them late, however, credit cards can damage your credit rating.