by Amy Lillard
Credit and credit cards are an integral part of our economic system today. But there is a lot of misinformation and misunderstandings about credit. In this continuing series, we examine key concepts, tips and best practices when it comes to credit cards.
(10/23/2012) Credit is an integral part of financial health in today’s society. Obtaining a credit card, applying for a mortgage or auto loan, and even qualifying for other services like utilities is dependent on your credit score and history.
Part of your credit score (10 percent) is an assessment of the types of credit accounts you have or had in the past. Some credit accounts are viewed more favorably by the credit formulas used to calculate your score, and by lenders extending credit accounts. It’s important, then, to understand the types of accounts that exist and assess your situation when you check your credit score and report.
Non-Revolving Credit: These lines of credit are also known as installment agreements, meaning you pay a fixed monthly amount until the principal is paid. In exchange for this installment payment, you are charged interest (annual percentage rate) on the total amount. When the total principal is paid in full, the account is closed. These types of accounts include mortgages, auto loans, and student loans. Sometimes this type of credit is also considered “secured credit” - loans are extended with a valuable asset used as collateral, like your home or car. If you default on your loan, the lender can repossess the item.
Revolving Credit: These types of credit lines are ongoing, and include credit cards and department store cards. Consumers can borrow funds at any point up to a set credit limit. Monthly payments depend on how much credit you’ve used, and can be a minimum payment or a larger one. If you “revolve” some or all of the balance to later months, you are charged interest on this amount.
Open Credit: Less common than the first two, these accounts have no credit limit and borrowers must pay back the full amount each month. These can include cell service accounts and other home utilities.
For a healthy credit score and qualification for new accounts, lenders like to see a diverse collection of these types of credit in your history. This proves a capability at managing different finances over time.
For Additional Reading:
Understanding Your Credit Report: https://www1.salliemae.com/before_college/debtsavvy/repayment/understand-credit-report.htm
Interpreting Credit Reports: http://www.creditinfocenter.com/creditreports/decoderp.shtml
Account History on Your Credit Report: http://credit.about.com/od/creditreportscoring/ss/creditreports_4.htm
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