What Are the Advantages?
Did you know 10% of your credit score is calculated by the types of credit you have?
That’s right, the credit scoring system looks at your blend of credit, how well you manage it, and the quality of diversity.
A nice blend of credit shows more consumer reliability in the eyes of FICO®. In a nutshell you get rewarded for managing various type of credit such as revolving credit accounts, installment loans, open credit, etc.
First, let’s dig into revolving credit accounts.
In step 2 we talked about establishing active trade-lines by obtaining 2-3 secured credit cards.
A secured credit card is classified as a secured revolving credit account. Ideally you want 3-4 unsecured revolving credit accounts which is what your working towards.
Eventually as you establish positive payment history (6-12 months) with those secured credit cards you will be in a position to request for a credit limit increase with no additional deposit.
This additional increase will be classified as unsecured.
Now keep in mind to qualify for unsecured credit limit increases I am basing that on the fact that you are already worked on rebuilding your credit and leveraging your credit usage ratios on those secured credit cards.
Here’s an example of how you ultimately want to diversify your revolving/open credit accounts:
- 2-3 credit cards (Visa, MasterCard)
- 1-2 department store cards (example – Walmart, JCPenny, Target)
- 1 gas card (Texaco/Chevron)
- 1 charge card (American Express or Discover)
We will cover obtaining a department store card and gas card in greater detail in Step 6 where we cover credit pulls and inquiries. As far as obtaining a charge card such as an American Express® Premier Rewards Gold Card; that comes later when your scores are in the high 600s.
Your FICO® scores will benefit by having a diverse set of account types on your credit reports. Having positive experience across multiple account types (revolving credit accounts, installment loans, auto, mortgage, open credit, etc.) is ideal because you’re proving the ability to manage various types of credit and accounts.
Do you currently have a mortgage and/or auto loan that you’re making timely payments on?
If so, great! You’re already ahead of the game since these types of accounts are part of the ideal blend of credit. If you don’t have either one, you may want to consider getting a small secured installment (personal loan) from a community bank or credit union.
Your bank or credit union will use your deposit as collateral (savings, CD, etc). This is a similar strategy to opening up a secured credit card but the account is not opened indefinitely.
The interest rate for payback on a secured installment (personal loan) is much smaller (3-5%) compared to an unsecured installment loan.
You’ll get the fastest improvement in your FICO® scores if you show you’re responsible with both major types of credit (revolving credit accounts and installment loans).
Now let’s talk about department store cards.
Obtaining 1-2 department store credit cards is nearly not as difficult to obtain compared to an auto loan or charge card. The reason is department stores carry much lower limits compared to major credit cards. Even if you are a risk, they are more willing to extend you a smaller line of credit so you can shop at their store!
The easiest department store credit cards to qualify for are Walmart and Target. These cards tend to be much easier to get approved for even if you have low credit scores.
But before you go out and apply it may be beneficial for you to wait for Step 6 where we list some of our name brand creditors and which credit reporting agency they pull from plus the FICO® score range you need to qualify.
Remember, the diversity of credit account types you have reporting on your credit reports is seen as a sign of stability and credit responsibility.
Call Today for a FREE No Obligation Credit Consultation:
517-518-8847
Stay Tuned for Step 6!
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To your success in credit and life,
Marco Carbajo