What Is Credit Diversification
Credit diversification is at the core of your “credit worthiness”, which should not be confused with your credit score. I say this because you can often have a high credit worthiness, but not have the highest of scores.
When discussing credit diversification it’s important to know the 4 different lines of credit you can acquire. In order of most important to least, each of the following lines of credit offer different levels of authority when evaluating your overall credit worthiness.
Secured Installments Loans
- Home Mortgage
- Auto Loan
- Furniture Purchases
Unsecured/Revolving Lines Of Credit
- Standard CC Cards/Bank Cards (Capital Ones/Chase/Citi Bank)
- Not to be confused with a Credit/Debit Check Card
- Store Charge Cards
Unsecured Installment Loans
- Student Loan
- Personal Loan of $2000 or more
Secure Lines Of Credit
- Credit Cards that have an asset (cash-money) backing up the allowed balance.
It should be your goal to build a portfolio of all four of these credit lines. If your not able to jump straight to the top, that is ok. Remember that this is a building process.
For some, a secured line of credit is a great way to start. While others may be eligible for or have revolving credit lines or unsecured installment loans already.
If it’s the latter, then it’s important to know there are methods on how to better leverage these lines to your benefit, and even receive larger limits of credit on such accounts. (We will cover that on in another post)
Often times your credit repair specialist will have access to resources that will help you in acquiring both lines of secured and unsecured credit. Just ask them.
Misconceptions of Credit Diversity
A big misconception that people have is that to many lines of open credit is a bad thing. However this can not be any more un-true.
Reason being, lenders like to see that you are responsible enough to manage multiple accounts.
This is why, if your score isn’t necessarily a +700, but you have for example, 8 open lines of credit that are in good standing and your debt to utilization is below 20%, you are much more attractive when it comes to lending purposes.
Another misconception is closing old accounts for fear of having to many open. It’s important to not close any old credit cards that have zero balances before you are about to apply for a loan or new line of credit. The reason for this is that those cards have reporting history, and if they have a zero balance they aren’t hurting anything anyway.
Maintaining longer terms of good reporting history on such cards is in your favor, and in most cases you would not want to close any cards prior to applying for new lines of credit.
The Benefits Of Diversity
The benefits of having a more diversified credit portfolio are relatively cut and dry. The larger the limits and the more lines of credit that you maintain the better you look in the lenders eyes. Which means the more likely you are to be approved, as well as receive higher limits and lower interest rates.
As we previously covered, lenders prefer someone with more credit lines that are in good standing when compared to someone with fewer credit lines that are in good standing. The more you have, means the more you have to manage, which in turn signifies higher levels responsibility and worthiness.
The key is to have good payment history (no late payments) and to maintain a credit-to-debt ratio of below 20%. So long as you practice these habits you will benefit for having a diverse portfolio of credit lines.
How To Achieve It
Oftentimes financial experts at credit repair agencies will be able to get you started with both unsecured, secured, or primary lines of credit. We recommend you ask them what they offer and how they can help you achieve your long term financial goals.
When you are applying for these new lines of credit it would be wise to consult with financial expert on methods you could use to achieve faster growth and increased better credit worthiness.
For example, when the card company request your total annual income. Did you know this value can be derived by your total household income. It’s also important to report your employment in a consistent way. Creditors don’t like lending to people who are job jumpers.
As a rule of thumb for the inexperienced, it would be in your best interest to consult with your financial expert prior to application or when requesting an increase in card limits.
Hopefully we were able to shed some light on credit diversification, its importance and how it can be achieved. For long term financial success you should make your credit work for you and diversification is one of the most important steps to doing this.
Always remember, no credit is bad credit.