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Types of credit

Types of credit
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You are probably aware that in your personal finances you have some form of credit. But have you ever stopped to think about what types of credit you do have? And whether or not this could be impacting your credit score?

We take a look at the different types of credit most commonly used, the pros and cons of each and what they could mean for your credit score.

Instalment credit

Instalment credit is a type of fixed credit. Think car loan repayments, mortgages and personal loans.

Under this type of credit, you borrow a set amount and pay it off in instalments over an agreed period of time.

Pros

  • Your monthly repayment amount is fixed, which makes budgeting easier.
  • Timely payments towards instalment loans can help you build a strong credit score.
  • Instalment loans can help you purchase high-value items and pay them off over a long periods of time.

Cons

  • You cannot carry a balance from month to month.
  • There may be additional fees like early repayment charges or arrangement fees.
  • There is a risk of damaging your credit score if you miss your monthly payment.

Revolving credit

Most of us have some experience with revolving credit. Credit cards or lines of store credit are examples of revolving credit.

The features of this type of credit include having a limit on how much you can borrow, an agreed minimum monthly payment and the ability to carry balances over. But be warned: if you do carry a balance over, expect to pay interest on what you owe. And in terms of credit cards, this can be quite high.

Basically, instead of borrowing a lump sum of money that is paid off over time, you can use this type of credit only when you need it.

Pros

  • You aren’t tied to a fixed lump sum. Instead you have the advantage of using only what you need at the time, which makes it a good option for an emergency or a surprise expense.
  • It’s more flexible than instalment credit. You have the opportunity to carry a balance over if you can’t pay it off in full.
  • If used correctly, revolving credit can help you to learn positive credit habits and improve your credit score.

Cons

  • Interest rates tend to be high with revolving credit types, and the ability to carry balances forward could put you in financial difficulty.
  • There are often late payment fees, cash advance fees, balance transfer fees and penalties for exceeding your limit.
  • If you miss a payment you could negatively impact your credit score.

Does having a credit mix help?

It may come as a surprise, but having different types of credit can actually improve your credit score. It shows lenders that you can handle a variety of obligations.

However, it is just one of many things that can help you achieve a good credit score. The three credit reference agencies (Equifax, Experian and TransUnion) mainly look at the following:

1. Payment history: Whether or not you have any unpaid debts or whether you have missed any payments in the past.

2. Credit available: How much credit is available to you (e.g. how many credit cards you have or loans you have taken out).

3. Length of credit history: This is how long you have responsibly handled credit for.

4. Credit mix: How many different types of credit you have and how well you manage them.

If you are interested in learning more about credit scores, check out our articles on how to improve your credit score and surprising things that could hurt your credit score.

Looking for a new credit card?

Great credit card offers are out there — you just need to know where to look! If you’re after the top offers on the market, a great place to start is our list of the top credit cards.

Click here to see MyWalletHero's top credit card picks for 2020.


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