What Kind of Loans Will Improve Credit the Most?

Learn how to use your credit cards the right way.
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When you become part of a couple and might be considering starting a family, you suddenly begin thinking about buying big-ticket items such as a house or a car suitable for a baby. You might wish you didn't blow the equivalent of half your student loan or rack up credit card debt on ski trips and beach vacations. But all that is water under the bridge. If you got yourself into a bad credit situation and need to improve your credit score, learn to use credit cards the right way. Doing so can raise those credit report numbers better than any other type of loan.


Credit cards, which have revolving balances, carry the most weight with the FICO credit scoring system. Credit cards have the potential to greatly hurt or improve your credit score. You must make the payments on time each month to improve your credit score. You must also use your credit card correctly. For example, if you max out your credit card and pay only the minimum payment each month, you won't help your credit situation much. In fact, you might hurt it. The amount of debt you carry affects your credit score. If you max out your credit card, it signals you have too much debt and that you might have difficulty paying your creditors. Ideally, you should use as little of your available credit line as possible. If you use more than 35 percent, you could hurt your score.

Credit Card Benefits

Paying off a credit card balance can improve a poor credit score more than paying off a mortgage, an auto loan or a collection balance, according to John Ulzheimer, President of Consumer Education at SmartCredit.com. Lenders view credit cards as a riskier type of loan than a mortgage or an auto loan because credit cards are unsecured. An asset secures mortgages and auto loans. In addition, you can determine how much to spend with a credit card. You can make smart decisions on how much credit you will use each month. Ideally, you won't spend more than you can pay off at the end of the month because, that way, you avoid paying interest. However, as long as you pay the minimum or more each month on time and don't use too much of your available credit, you will help your credit score.

Types of Credit

The types of loans you have make up only 10 percent of your FICO credit score. If you want to focus on this area, have a mix of credit that includes a credit card, a retail account, an installment loan and a mortgage. All of those are considered a good credit mix. A type of credit that could be viewed negatively would be a payday loan because that type of loan is usually reserved for people with poor credit.

Improving Credit

If your goal is to improve your credit, you should not necessarily focus on the type of loan. You should focus on how you handle your loan. Your payment history is the most important factor in determining your credit score. No matter what type of loan you have, you must pay it back on time every month. The second most important factor is how much you owe. These two factors make up 65 percent of your score. The rest is your length of credit history, which makes up 15 percent, and new credit and types of credit, which each account for 10 percent.

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