Can More Loans Help Your Credit?
Credit scores are fickle things. You would think the less debt you have the better but that can often be the opposite of true. So how can you have more loans but better credit?
What Makes Up A Credit Score?
Credit scores are made up of a number of factors that contribute to your overall financial health. This includes the amount of money you owe versus the amount you have available to use (credit utilization ratio), number of open accounts, number of closed accounts, age of accounts, on-time payments as well as debt diversity. These factors all work together to determine your credit score and are always in motion as your score changes month-to-month.
Why No Debt Can Be Bad
To create a good credit history you have to have a credit history. This means that you have to have something documented in your credit report. If you have only ever had one credit card without any other kind of debt your credit may be lower than it should be because there is nothing else to factor in to the equation. This is why it can be difficult for college students or people just starting out to open a credit card or take out a loan - they simply have no history for creditors to use for reference.
If you only have one credit card with a limit of $10,000 and you have $5,000 in debt you have a credit utilization ratio of 50%, which is quite high. Even though $5,000 is not a bug number when it comes to debt that doesn’t matter, the percentage is what factors into your credit score.
Debt Diversity is Key
The key to a healthy credit report and score is debt diversity. You want to have a history of multiple kinds of debt to show lenders that you are trustworthy and reliable. This means that you want to have more than just a credit card on your report. You want to have a personal loan, student loan, mortgage or car payment.
Now this doesn’t mean you need to go out and take out loans! This just means that if you wanted to purchase a car or take out a loan it would not be harmful to your credit even though it feels like it would be.
Some people who have a limited credit history will take out a personal loan, not use it, and pay it back in regular installments to build up a history of good credit. This is a good exercise if you can trust yourself to make every payment on-time and not spend any of the loan.
Fixing your credit can be as simple as making a call! We're here to help you rebuild and understand your credit. Give us a call to get started or learn more about what we can do for you 1-800-431-0449.