The type of credit you use accounts for 10% of how your FICO score is calculated. Generally speaking, a borrower with a mix of different types of credit (revolving, installment, and secured) will have a better credit score than someone with only one type of credit account. Let’s take a closer look at some of the specific impacts of different credit accounts on your FICO score.
Secured Credit Card (Revolving Debt)
For the purposes of your credit score and report, a secured credit card has the same impact as an unsecured credit card. Pay on time and your FICO score will get a boost. Fail to pay and you can watch your FICO score sink. The only drawback is that you must watch your spending since maxing out a typically low-limit secured credit card can hurt your debt utilization ratio and in turn hurt your FICO score.
Unsecured Credit Card (Revolving Debt)
An unsecured credit card has the same benefits as a secured one, plus it typically has a higher limit. With a higher credit limit, you can spend more and keep your debt utilization ratio low. With a low debt utilization ratio, you can better maintain a decent FICO score.
Charge Cards (Revolving Debt)
Charge cards such as AMEX can be tricky and even harmful in some cases because they can negatively impact your debt utilization ratio. Since charge cards technically have no credit limit, some issuers will report your credit limit as your monthly balance. For example, if you charge $500 a month to your charge card, then that issuer may report your balance and your limit as $500 making it appear that you have a 100% debt utilization ratio. That’s bad news because most credit experts recommend that you keep your debt utilization ratio below 20%.
Installment debt can include things like your student loans. This type of debt is considered positive and can significantly improve your FICO score. However it’s important that you keep up timely payments or the benefit of this type of debt is quickly lost. Also, even if you’re on an income-contingent repayment plan for your student loans, you won’t lose the positive impact that installment debt has on your FICO score as a long as you honor to your payment agreement.
Not to be confused with secure credit cards, secured debt includes loans such as your mortgage and auto loan. They’re considered secured loans because they’re attached to an asset (the house and car). These loans are also looked upon favorably and will have a positive impact on your FICO score as long as you have a positive payment history.
If you want to get the best FICO score, you must understand the impact of different credit accounts and approach your credit strategically.