The Best Kind of Loan for Your Credit Score

The Best Kind of Loan for Your Credit Score.

 

I’m often asked if having certain types of credit or loans is better or worse than other types of credit or loans.

I get questions like, “John, is it better to have a car loan or a mortgage for my scores?” I also hear, “John, is it better to have a secured card or an unsecured card for my scores?”

In fact, you can swap in almost any type of credit-related account and I’ve been asked about that scenario.

I’ve been getting this type of question for almost 15 years now, and it seems that people believe there’s value or a penalty for having certain types of loans or accounts on your credit reports. That’s completely understandable and, thankfully, almost a complete myth.

Credit Cards

First, let’s tackle the secured credit card, versus the unsecured credit card, versus the charge card question. The assumption is that the type of card has a direct impact on your credit scores. That’s an incorrect assumption, meaning, you’re not penalized or rewarded for having one type of card over another.

That doesn’t mean one form of plastic isn’t better or worse for your credit than another.  For example, a secured credit card is easier to max out than an unsecured credit card.

Why? The reason is because secured cards have considerably lower credit limits than unsecured credit cards. It has nothing to do with the fact that one is secured and one isn’t. It has everything to do with the credit limits.

Installment Loans

When it comes to installment loans, the issue of credit limits disappears because installment loans don’t have credit limits. They do, however, have original loan amounts.

An auto loan is likely to have a considerably lower loan amount than a mortgage, home equity loan and perhaps even a student loan. And, balances do matter on installment loans, albeit slightly.

Exactly like credit cards, credit scores do not treat installment loans of one variety or another differently. The collateral issue of balances can cause variable score impact, however.

Defaulting

One thing we haven’t addressed yet is the issue of missing payments and defaulting. Defaulting on a credit card, secured card, charge card, auto loan, mortgage, or any other kind of credit card, is treated equally — as one default.

You’re not penalized because you’ve defaulted on one variety of credit account versus another. You can, however, have a much larger default amount on a mortgage than any other type of credit account and that’s where the score impact can be variable.

The bottom line is: it’s not really the type of account that’s important, but it’s the incident that matters.

One Exception to the Rule

There is one very small exception to this rule. In fact, it’s so small that I thought very hard about omitting it.

There’s a chance your score could be negatively impacted if you have too many finance company accounts on your credit reports. These are the loans offered by consumer finance lenders who often target the near or subprime consumer.

Notwithstanding the consumer finance issue, the lender is also meaningless in your scores. So, you don’t get rewarded for doing business with a large, well-known credit card issuer and you don’t get penalized for doing business with a subprime credit card issuer.

In fact, credit scores are brand agnostic when it comes to your credit accounts. The most important factor is how you manage them.

Editor’s Note: This article by John Ulzheimer was originally published on MintLife.

See more from Mint.com:

Read more: http://www.minyanville.com/trading-and-investing/personal-finance/articles/credit-score-credit-score-meaning-installment/10/25/2012/id/45351#ixzz2APp8zSGT

Advertisements

3 thoughts on “The Best Kind of Loan for Your Credit Score

  1. […] Mortgages and Credit Scores Today, credit scores plays a big role in determining whether or not your mortgage loan is approved and at what interest rate.  Obtaining a mortgage loan at an interest rate just one point less results in a savings of about $5,000 on the average 15 year mortgage, and significantly more on a 30 year mortgage (about $50,000).   Why do lenders use your credit score in their lending decisions?  Because they discovered that there is a direct correlation between your credit score and the odds of your becoming delinquent on your monthly mortgage payments. Consider the following statistics the mortgage industry has compiled: If Your Credit Score Is   780   […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s