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Get a better credit score by mixing up types of credit

Paying off one credit card every month won't boost your rating

By Todd Ossenfort

The Credit Guy
'The Credit Guy,' columnist Todd Ossenfort
The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues.

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Question for the CreditCards.com expert

Dear Credit Guy,
Will your credit score never increase if you just pay your balance in full every month? -- Angie

Answer for the CreditCards.com expert

Dear Angie,
In order to get a complete assessment of your creditworthiness, the credit scoring models evaluate how you manage different types of credit accounts. If you are missing some of the elements included in calculating your credit score, your score will be lower.

The different types of credit accounts that are typically included in the credit scoring models include credit cards, retail accounts, installment loans (such as a car loan), mortgage, consumer finance accounts, etc. So, if you don't have an installment or mortgage loan reported on your credit report, the on-time payments to your credit card account that you pay in full each month will only go so far in boosting your score.

You need to prove that you can make the same monthly payment each month on time as required on an installment loan or mortgage. Your credit card account can vary each month as to how much you charge, and you can choose not to charge anything some months. To more accurately predict if you are a good credit risk, making the same monthly payment amount over an extended period of time is one of the ways the scoring models can make that prediction.

To boost your score, you could consider adding an installment account to your credit profile. Mind you, do this only if you can afford the additional monthly payment, and you obtain the loan for something you were planning to purchase anyway. For example, if you want a new HDTV and were planning to buy one for the holidays, you could purchase it using an installment plan (go for one with no interest if paid by a certain date). A word of caution: Should you get a loan of this type, be sure you do pay in full before the interest-free period ends, or you will be charged interest from the date of purchase.

If you are young or new to credit, I recommend that you be patient and build your credit profile as the natural events in your life occur. One example would be buying a home. Don't rush into acquiring credit before you really need it or can afford it just to increase your credit score. From what you have said, you are managing your credit well and paying off your credit card purchases in full each month. While the on-time and in-full payments may not be dramatically increasing your credit score, should that change and you make late payments, your score certainly will go down. And, it will take time to get back to the credit score level you currently have should any negative information be added to your credit report.

Take care of your credit!

See related: Know the 5 components of a credit score, How to read FICO's explanations of what's hurting your credit score, Interactive: Shop your way to a better credit score, Your keys to getting in the 700+ credit credit score, Understanding how credit scores work

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to The Credit Guy.

Published: December 20, 2010


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