Intro to Credit Gaming - Part IV

First off, my apologies for the lack of recent posts. A short vacation where Internet access was surprisingly un-handy, coupled with a car accident and all the hassles that went along with it, have kept me from posting. In any case, I'm back, the car is getting fixed, and hopefully I can keep up a more rigorous posting schedule.

The fourth component of your credit score is 10%, "Types of credit used." Basically this simply means to have balance in your credit portfolio. Fair Isaac likes a blend of installment loans and revolving loans. Other credit scores (such as the Vantage Score) break it down even further, preferring to see a mortgage and possibly other specific kinds of loans such as auto loans and student loans.

This is one area where it's pretty easy to max out your score. Just have at least 3-4 credit cards and 2-3 installment loans. Try to balance out your amounts financed and/or credit limits on each kind of loan.

The credit cards are easy to get. Installment loans are a bit harder to come by, but they often come up in the course of your life. If you've got student loans, those count (and, depending on how your lender structures the loans, they may show up as multiple accounts, one for each year of school for each type of loan). Auto loans also count, as do mortgages. In a pinch, it usually isn't hard to get a small installment loan for a few thousand dollars from your bank.

Basically the red flags to avoid here are 1) not having any of one type of credit, and 2) having an extreme disparity in favor of revolving credit. For instance, if you've got $100k in revolving credit lines but your installment loans total up to $20k, you might see a problem here. Fortunately, installment loans tend to be for big, expensive things such as houses and cars. If you have a mortgage, chances are that the amount financed will be substantially more than your revolving credit lines, so no worries there.

You may be wondering why this component is included at all. Well, the credit score is all about trust. If a bank gives you a loan or a line of credit, can they trust you to pay it back? The credit score is just a number encapsulating how much they can trust you. Having revolving credit shows that you can handle having quick access to money, and that you use it wisely. Having installment loans shows that you can accept a big, long-term debt and make the same monthly payment, month after month, year after year. These two aspects of financial responsibility contribute to your overall trustworthiness, and thus they are part of your credit score.