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Do some balances improve credit scores?

Oct 05, 2015 Walt Wojciechowski

Do some balances improve credit scores?

The problem that often arises when it comes to discussing credit standing is that consumers don't always know what does and doesn't impact their scores, even if they think they do. For instance, many people may believe that having some credit card debt can be a positive for their credit standing, when that is, in fact, not the case. But that principle may not be wrong in all cases, because having a variety of different types of accounts in one's name can actually be a benefit.

The reason this is the case is relatively simple: A credit score is just a three-digit number that is used to reflect a person's ability to handle credit on an ongoing basis, so the more that can be done to demonstrate that a consumer can do this, the better. A good way to do that is, of course, to have as many different types of accounts as possible. That means having a credit card, student loans, an auto loan, and perhaps more, and making sure to keep up with all payments every month.

What does this mean?

The amount of different types of credit a person has in his or her name is known as their "credit mix," and it makes up 10 percent of that borrower's total score. Therefore, the more different types of accounts they have, the better this aspect of their score will be, because it demonstrates to lenders that they can juggle a number of balances with different types of methods available to pay them back (i.e. credit card balances can be added to or subtracted from each month, while installment loan debts can only be paid down).

So while it's never a good idea to take out a new account just for the sake of improving a score - and indeed, having new credit will actually lower a person's score for a while - having more than one type of account is usually wise. Meanwhile, though, it's probably wise to likewise avoid taking on more debt on credit cards, or having more of this type of account than makes sense for a person's current credit needs. That is only likely to lead to additional debt, which can imperil not only their credit standing, but also their overall finances.

What else can borrowers do?
The more that can be done to help consumers understand the ins and outs of credit, the more likely they're going to be to be able to maintain a strong score. In the meantime, though, it might be wise for consumers to become more acquainted with alternative credit scores, which may be able to help them sort out their financial issues in the short-term. This is because alternative scores take into account more than just how people have handled credit accounts, which includes examining how they've handled monthly costs like rent and utilities payments. That, in turn, serves to create a more complete financial picture for them going forward.