If you’ve been independent for awhile, especially when it comes to your finances, you’ve no doubt realized by now that your credit score is instrumental in getting through life. Whether it’s taking out an application for school loans, getting a new credit card, applying to live in an apartment complex, or trying to buy a new car, there are so many instances where your credit score comes into play.
For many people, the challenge lies not only in keeping a high credit score, but understanding how their credit works in the first place. There are numerous factors that come into play that influence your credit score, including your credit history, number of accounts open, and others. One aspect that many people neglect, indeed, may not even be aware of, is their credit diversity.
Credit diversity translates to, in layman’s terms, the number of different types of credit that you have access to. Different types of credit have different requirements to remain in good standing with the creditor. It’s a very different beast to try and keep up with mortgage payments and homeowner’s insurance than it is to just make the minimum payments on a credit card. Credit diversity is a factor in your credit score because it shows whether or not you can handle numerous types of credit, with a host of different requirements, responsibly.
To that end, if you haven’t given any thought to diversifying your credit portfolio before, you need to start, and this guide will help you take that first critical step by identifying some safe methods you can use to diversify your credit.
Apply for a Few Different Types of Credit Cards
People tend to think that a credit card is a credit card, and the only real difference is whose logo is on the card. This line of thinking is completely off the mark, though, because there are many variations of credit cards that you can tap into. There are retail cards, bank cards, gas cards, and many others that you can apply for, and they’ll all be slightly different.
For you, trying to improve your credit score with more diversity, this is a very good thing. A card with frequent flyer miles for airlines will have different terms, credit limits, interest rates, APRs, and minimum payments than a gas card from your local Shell station, and if you can successfully manage both, your credit score will improve as a result.
To use this method successfully, pick out two to three different businesses that you use the most, and apply for a credit card at each. I would recommend you get a credit card through your bank, a card for where you buy the bulk of your groceries, and a card for where you most often pump your gas. You don’t have to use each and every card all the time, and you certainly don’t need to start wracking up a high balance. Instead, just use these cards for the purchases you have to make, and that you could use cash for instead, so you know you can safely afford them.
One thing to be very careful about is that you don’t apply for all of these cards at once. Any time you apply for a new card, a hard check will be made against your score, which will drop your score anywhere from two to 20 points. That’s not a big deal on its own, but multiply that by two or three hard inquiry, and suddenly your credit score has taken a big hit. Wait four to six months in between credit card applications.
Take Out a Personal Loan
Many people only resort to loans when an emergency strikes, when they’re up to their eyeballs in debt, or when there’s a major purchase to be made. There’s certainly nothing wrong with any of those options, but loans don’t only exist for when things go wrong, and for diversifying your credit portfolio, a loan can be a great option.
Examples of things you could use a loan for could include a house or a car, and those are the most common types, but a personal loan, that you can use for something less substantial, can be every bit as effective for diversifying your credit. Think about it like this: you’re not going to renovate your home or take a vacation until you can afford to pay for it out of pocket anyway, but just putting those expenses on a credit card or paying in cash won’t do anything else for you.
By contrast, taking out a personal loan to fund your personal expenses will not only allow you to pay for everything at once, it will also give you another diverse data point for compiling your score, and, so long as you pay off your loan on time, it will strengthen your credit history as well.
Keep Your Old Accounts Open
You probably went through a phase in your life when you just had to buy all your clothes at Forever 21, or when you absolutely could not do without 100% organic vegetables that you could only find at Publix, and you’ve got the credit cards to prove it. But now, you’re older, and those short shorts don’t look as appealing anymore, and you can settle for the Kroger brand veggies. With that in mind, you may very well be considering closing your credit cards for both stores, but for diversifying your credit, it’s detrimental to keep them open.
Tied in with credit diversity, your credit history plays an even larger role in calculating your final score. If you’ve always paid off that Publix card and that Forever 21 card, on time and in full, then you’ve built up a solid history with both accounts, and that will help you ensure your score is healthy. In addition, by keeping those accounts open, you’re keeping the types of credit you have access to diverse, and retaining a higher credit limit, both of which will serve to increase your score even further.
Now don’t get me wrong: if you absolutely need to close an account, either because you are paying annual fees on accounts that are not being used, or because you have more bad history on an account than good, by all means, do so. What I’m saying is, try to avoid doing so if at all possible, and even then, close a retail card, as opposed to a bank or gas card that you may in fact use again some day.