How The Types of Credit Accounts You Have Affect Your Credit Score

Most Canadians don’t think about their credit scores until they need to. When it’s time to take out a mortgage or purchase a new car, this trivial little number becomes a lot more important. If you haven’t yet built your credit or have bad credit due to financial hardships, then you may want to build your credit before applying for any loans. But what exactly affects your credit scores and how does your loan type affect it? 

What Does Having A Good Mix Of Credit Mean?

Your credit history begins to build as soon as you open your first credit account, whether it’s a loan, a credit card, or a cellular phone plan. Over time, it’s a good idea to maintain multiple accounts, and even better if you have a variety of account types since lenders like to see that you can manage payments in each area.

There are four main types of accounts that might appear on your credit report:

Installment

Installment loans are paid back through regular payments or installments, that remain the same every month, for a specified amount of time. When the loan is fully paid, the money is no longer available to you. Example: car loans.

Revolving 

When you borrow money, up to a certain limit, and pay it back as you use it, or pay minimum monthly payments while carrying a balance, you are using revolving credit. Usually, you can continue to borrow and repay with this type of credit, until you (or your lender) decide to close the account. Example: credit cards.

Mortgage

If you finance the purchase of your home, your mortgage account may show up on your credit report, but not always. The mortgage companies who do report, typically report to only one of the two CRAs. It’s a good indicator of whether you make payments reliably, but this information isn’t used in the calculation of your credit score.

Open 

With these accounts, you can borrow as much money as you need, up to a maximum limit. Payment of the balance is due by the end of each payment period. Example: monthly cellular phone plans.

How The Types Of Credit Accounts You Have Can Affect Your Credit Scores?

Maintaining diversity in the types of credit accounts you use can help boost your credit scores. A good mix of credit accounts may include having a credit card, a car loan, a mortgage, a line of credit, and a personal loan. Lenders generally want to see a mix of different loan types to see if you’re able to responsibly manage it. 

Additional Reading

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What Else Can Affect Your Credit Scores?

When you understand how your credit scores are calculated, you can use credit responsibly, hone in on the areas that need work and help build your scores over time. Besides the credit mix, here are some other common factors used when calculating your credit scores. Depending on the model used, the weight placed on each factor may vary. 

• Payment History (35%) – Have you always paid your accounts on time? Do you have any missed or past due payments in your history? Have you ever filed for bankruptcy or filed a consumer proposal? These records will help lenders predict your future payment behaviour. If your payment history is littered with missed payments, your credit score will likely be lower. If you always pay on time, your scores will likely be higher. 
• Debt-to-Credit Ratio (30%) – How much debt you’re carrying in regards to your available credit limit can also affect your credit scores. Generally, keeping your usage under 30-35% of your limit may help keep your scores healthy.
• Credit History (15%) – How old are your credit accounts? Do you have a mix of older and newer products in your file? Creditors like to see that you have been able to manage credit over time. The higher the average age of your accounts, the better the impact on your credit scores. 
• Number of Inquiries (10%) – How often are you applying for new products? Too many hard credit checks on your file may lower your credit scores and may be seen as a red flag for lenders. 
• Types of Accounts (10%) – Do you have a mix of credit accounts on your credit file? Lenders like to see that you can handle revolving and installment credit, so a variety of accounts will affect your credit score in a positive way.

Where Can You Get Your Credit Report? 

You can access your credit report and credit scores anytime, by contacting one of the two credit bureaus in Canada. Since the information reported to each one varies, with your creditors, it’s a good idea to pull reports from both companies.

	Cost	Credit Score	Credit Alerts	Link
	Free	Yes	Yes	Visit Site
	Free* (with credit monitoring)	Yes	Yes	Visit Site
	Free	Yes	No	Visit Site
	Free	Yes	No	-

Bottom Line

It’s a good idea to keep an eye on your credit regularly. Make sure that your personal information is accurate and check for errors in your accounts or account history, to help prevent identity theft and help you keep your credit scores healthy.