Account Diversity to Build Your Credit

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Your credit score is based on a number of different things. Paying your bills on time, having an established credit history, and making sure your credit cards aren't maxed out are all important ways to keep your credit score high. But the types of credit you have also play a part in your overall score. 

Types of Credit

Most of the accounts on your credit report will fall into one of these categories: 

  • Installment Accounts

    This type of account is a fixed amount of money that you make fixed payments on over a specified amount of time. The monthly payment is comprised of the principal, which is the actual amount of the item, and the interest rate. The interest rate is a percentage and it is the amount you pay the lender to borrow money. Some of the most common types of installment accounts include:
  • Open Accounts

    Open accounts are comprised of services you pay for in full each month. There is no credit limit, and there is no set payment. This type of account is typically not reported on your credit report, but a growing number of companies are beginning to report to the credit bureaus. Additionally, if you're very late on a bill you could be turned over to a collection agency, which would also show up on your report.Open accounts include:
    • Cell phone bills
    • Utilities
    • Cable services
  • Revolving Accounts

    Revolving accounts have a different payment every month, depending on your balance and interest rate. You don't have to pay the balance off each month, but a revolving balance accrues interest. Credit cards are the most common form of revolving credit. 

Will Account Diversity Build Your Score? 

The types of accounts on your credit score make up about 10% of your overall score, according to the FICO scoring system. While this probably won't make a big impact on your overall score if you have established credit, but if you are still trying to build your credit, the different types of credit will play a larger role. 

If you don’t have much of an established credit history, here are some tips to help improve your account diversity:

  • Compare and apply for credit cards. For people with good credit, it’s easy to get approved for a card. Credit cards for people with bad credit, however, are a little harder to come by. You might need to get a secured credit card, or be prepared to pay higher interest. Having at least one card will help you to improve your diversity.
  • Consider an auto loan. An auto loan can also help you improve your credit diversity, and it’s something more people will need to get a loan for at one point or another.
  • Work towards a mortgage. A mortgage will give you the highest amount of points in the account types category. If you don’t already have a home loan, make it a goal to get one. This will also help improve your score.

Having the right mixture of accounts and lines of credit can impact your overall credit score, so make sure you have a mixture of all types of credit!

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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. CreditCardXpo.com recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.