Credit Card Debt Is Worse Than Mortgage
The combination of credit types is an advantage for your rating – a 10 percent credit rating is determined based on the types of lines of credit you have opened.
But loan combination in and of itself is not always good – there are different types of “good” and “bad” debt (and as we all know, too much debt is never good). Here’s what you need to know, as outlined in The Motley Fool .
Unsecured debt
Unsecured debt means that the lender cannot collect the collateral if you do not make payments, although there is an agreement that you will pay it off. Examples of unsecured debt include credit card debt, medical bills, and student loans. If you do not make the payment, you may be sued.
Interest rates on unsecured debt are higher than on other forms of debt (such as a mortgage) because it is more risky for lenders to lend you a loan.
Circulating debt
Working debt is usually the easiest way to get a loan. Credit cards are your most common type and a good example of revolving debt: you borrow monthly up to a predetermined limit, and the repayment is based on a percentage of the amount you’ve spent. Other examples are home equity lines of credit and personal lines of credit.
There are usually no strings attached as to how you can use your revolving debt, and you can spend (or not spend) as much as you need, within your limit each month. Interest rates are usually variable and higher than other forms of debt.
Working debt does not have to be unsecured, although it usually is. Credit cards, in particular, have high interest rates, which means that while having credit accounts can boost your rating, maintaining a balance every month will hurt you in the long run. You should always make at least the minimum payment every month, but strive to pay the full balance.
Debt payment by installments
An installment debt is a large lump sum that you pay on a monthly basis. The best example is your mortgage, which usually has a fixed low interest rate and a repayment plan. Other examples are student loans, car loans and personal loans.
Not all installment debts are the same: Mortgages and car loans are secured debts, which means the lender will repay the debt by confiscating the property if you don’t pay. Personal loans are not secured, so interest rates may be higher.
Remember, while a combination of loans can help you estimate, your utilization rate (how much of your line of credit you will use up) and your payment history are much more important and carry a lot of weight. Never borrow more than you can afford to repay, and making payments on time will boost your rating far more than accepting various types of debt.