How Different Types of Debt Impact Your Credit

Your credit score is affected by how well you handle borrowed money. This includes factors such as your history of making payments on time, how much debt you have, the age of your accounts and how many recent inquiries there have been on your credit. Another factor is credit mix, which brings up the question of how different types of debt impact your credit.

Different Types of Debt

There are several different types of debt, and since they have different payment plans and terms, they may impact your credit differently. Some types of debt include:

  • Mortgage – When you finance the purchase of your home, the loan is secured by the property. This offers some assurance to the lender that if you don’t make your payments, they’ll be able to sell the property and recover some of the debt. A mortgage is financed in installments over a number of years, typically 15 or 30 years.
  • Vehicle loan – A vehicle loan is also a secured installment loan, paid back in predictable payments over a set term, such as three to six years. Your lender has the security of knowing they can repossess the vehicle if you default on the loan.
  • Student loan – This type of loan helps to finance your education and is typically paid back over ten years, although your payment terms can vary. For many people, this is the first type of debt that allows them to start building a credit history.
  • Credit cards – These are revolving accounts that don’t have to be paid in full by a certain date. As long as you’re careful to pay your bills when due and you avoid using too much of your available credit, this type of debt can help you to build a good credit history.
  • Personal loans – These are installment loans that can be taken out for a variety of reasons, such as buying furniture or paying for an unexpected medical bill or repair. Taking out a personal loan to consolidate credit cards may be beneficial if you’ve started to have more credit card debt than you can manage comfortably.

Lenders usually like to see that you’ve handled more than one type of account, but this factor doesn’t have a huge impact on your score. Your credit mix is only ten percent of your FICO score.

Protecting Your Credit

No matter what type of debt you have, the most important thing to do is to make your payments on time. To be sure you don’t forget to make payments on time, you may want to set up automatic payments or put a reminder in your phone when bills are due. Avoid borrowing more than 30 percent of your credit limit on credit cards.

Keep an eye on your credit reports and make sure there isn’t incorrect information being reported. Wrong balances or wrong payment statuses can bring down your credit score and make it harder for you to get approved for credit at the best rates in the future. Dovly is an AI credit engine that can dispute errors for you and help you track, manage and fix your credit. Try it risk-free with our free membership tier.

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