When it comes to debt, we’re usually focused on how to get out of it. But is debt always bad for your credit? Since it mainly stresses people out, debt often has a negative image in our minds. However, not all debt is bad. And since it can have such a big influence on your credit score, it might be time to consider if there are positive aspects to debt. Sometimes, debt that increases your net worth and future value is beneficial–as long as you make regular payments. In fact, some amount of debt on your credit report is a positive indicator for lenders. It reflects a solid payment history and shows them that you are a responsible borrower. However, if you have no debt at all, there is no way for lenders to determine how you will handle it.
3 Types of Debts That Can Boost Your Credit Score
10% of your credit score is determined by the mix of credit accounts you have. So, a healthy mix of accounts can boost your credit score. And this can be classified into 3 different types.
Installment Debt
A mortgage is the best example of this type of debt. You borrow a large amount of money upfront and agree to repay it with interest in the form of regular monthly installments. Student loans, car loans, and personal loans also fall into this category. Installment debts are usually hard to qualify for since they typically involve large amounts of money.
Revolving Debt
Credit cards are the best example of revolving debts. You are given a line of credit that you can borrow up to. The best part about revolving debt is the flexibility that it offers. When necessary you can make use of these funds without having to approach a lender for a loan. Home Equity Line of Credit (HELOC) is another type of revolving debt. However, it’s important to use revolving debts in a responsible manner. Otherwise, you run the risk of getting trapped in an unending cycle of debt.
Open Debt
This is the least common type of debt to be found in credit reports. In this type of debt, there is no predefined credit limit. You run up a balance and pay it in full at the end of each month. Failing to pay the full balance attracts a heavy penalty. Your cell phone subscription is another example of open debt.
When your credit score is calculated, the diversity of credit accounts is a primary factor. Therefore, maintaining different types of credit accounts such as a mortgage, auto loan, and credit card is crucial to show lenders that you can manage all types of debt responsibly. However, borrow money only when you can afford to pay it back. Do not borrow for the sake of your credit score. Remember, loans that boost your score can also pull it down completely if you fail to make timely payments.