Looking to edge up your credit score to get the most attractive
rate on a mortgage in the next year or so?
While handling credit cards responsibly is the best way to boost
a credit score, if you need to break through a barrier, you can
look to your
. Having greater diversity in the types of credit you use can nudge
your score up -- as long as you make your payments on time.
factors in calculating your credit score
are payment history (35 percent) and the amount you owe (30
percent), according to FICO, the San Jose, Calif.-based agency that
calculates and issues
FICO credit scores
. Length of credit history (15 percent), new credit (10 percent)
and credit mix (10 percent) make up the rest of the pie.
While credit mix is a small category, it can make a difference
if you are struggling to shift a FICO score up a notch -- from,
say, 720 to 740. "We're talking about 10 to 20 points, not 100,"
says Ethan Dornhelm, principal scientist at FICO.
Having a variety of successfully managed credit accounts,
ranging from revolving credit cards to
(such as personal loans, auto loans and mortgages), shows
responsibility in handling a wide variety of credit types, Dornhelm
says. "If we look at risk patterns, we find that people who show a
healthy balance of usage of all types are a lower risk," he
No pain, no gain
Before you go hunting for new credit, be warned: Taking on
different types of credit won't automatically boost your score. In
fact, your score may dip temporarily, Dornhelm says, when the
lender performs a
on your credit to determine your ability to repay. Hard pulls are
just temporary dings, however, as long as you proceed slowly and
carefully when applying for new credit. Too many new accounts may
be interpreted by a lender as a sign you are in financial
But making payments on time will help your score recover. For
example, Dornhelm says taking out a $5,000 car loan has the
immediate effect of lowering a score because it's new credit. After
making five steady payments, though, your score should rebound to
its former level and then some.
Just make sure you can afford those payments. If you take on
debt you can't afford, you'll end up doing more harm than good.
Paying on time is key. "As long as you demonstrate responsible use,
you'll benefit," says FICO's Dornhelm.
With that in mind, here are some good -- and not so good -- ways
of adding variety to your credit mix with installment loans. A
green light means go ahead, as long as you've weighed the pros and
cons. Yellow means take care -- there could be trouble ahead. Steer
clear of the
Car loan: green light
Even if you can afford to pay for a car with cash, you may want to
consider paying it out over time. If your credit is good, you may
qualify for a very low-interest loan that could help your credit
mix and eventually boost your credit score even higher.
You can get car loans from several different sources. Most
dealers are affiliated with finance companies that offer loans. You
can also get a loan through your bank or credit union. The better
your credit score, the lower the interest rate you'll be
If your score is less than stellar, consider using a credit
union. Interest rates at federal credit unions are limited by law
to 18 percent, and may be more reasonable than rates at
buy-and-drive car lots or finance companies, says Rex Johnson,
owner and founder of Lending Solutions Consulting Inc., a
credit-union consulting firm in Elgin, Ill.
In addition, nonprofit credit unions want to help people build
credit scores and are more forgiving of less-than-perfect credit,
How long should the loan be for? Let your budget be your
Johnson says that, because credit history counts for 35 percent
of your FICO score, a longer loan paid off faithfully will do more
to boost your credit score than a shorter loan. But you'll end up
paying more interest with a longer loan, and it's not worth
stretching out your loan terms just to improve your score, Johnson
Personal loan: green light
Personal loans are generally made to individuals without any
collateral needed. People use personal loans for consolidating
credit card balances, paying tax bills, financing weddings or any
number of other expenses.
One of most
attractive things about personal loans
is that they may have a lower APR than a credit card. San
Francisco-based Wells Fargo, for instance, offers personal loans
from $3,000 to $100,000, starting at around 7 percent APR. That
compares to the
average credit card APR of 14.96 percent
arranged by companies such as Lending Club and Prosper are an
increasingly popular route to personal loans. Those firms report
your account activity to the credit bureaus, meaning they should
help build your credit if you pay on time. You generally need a
very good credit score to qualify, but the application process can
be easier than going through a bank.
Student loans: green light
FICO also considers student loans when looking at your credit mix.
As installment loans, student loans carry the same weight as, say,
a car loan, Johnson says.
The key to having student loans build your credit score is to
stay on top of the payments. Ideally, that means making the
required payment every month. It can also mean keeping in touch
with lenders if you can't pay on time. Heidi Berardi, director of
education and community outreach at the nonprofit credit counseling
organization Family Credit Management in Chicago, advises
contacting the National Consumer Law Center's
Student Loan Borrower Assistance Project
if you're having trouble with payments. They can help you find out
about consolidating your student loans. "If you are communicating,
you're current," she says. "That's very big."
Store loans: yellow light
Installment loans from furniture or hardware retailers also can add
variety to your credit -- but proceed with caution. Home Depot, the
Atlanta-based chain of building supply stores, offers a Project
Loan for up to $40,000. You get six months to repay the loan
interest-free. After that, you'll be charged interest at a rate "as
low as" 7.99 percent annually, according to the store's
Such loans come with a caveat, says Berardi. She recommends you
pay off the loan in the allotted time before interest charges
Other experts are even more cautious. "For the most part, these
loans aren't worth it even if you pay everything on time," says Tom
Joyce, vice president of marketing at the Better Business Bureau
serving Chicago and Northern Illinois.
Better to pay with a credit or debit card, he says. He notes
that credit cards usually have lower interest rates than store
loans and a credit card company is more likely than the retailer or
finance company to have your back if the furniture falls apart a
month after you buy it.
More importantly, credit bureaus look askance at store loans,
"because they make people look like they're in financial trouble
and can't pay for something themselves," Joyce says. They're
considered a last resort.
The BBB's final advice? Use your credit or debit card to pay for
big purchases. If you do succumb to temptation, read the fine print
for interest rates, prepayment penalties and other potential
Gearing up your credit score before a house
Don't jeopardize great credit with new credit