First off, having credit is only important if you do not have the cash to pay for things. If you have cash then you don’t need credit. Credit is simply a record of your ability to pay back loans. Since many people are not cash rich then having good credit is a necessity. However, try to use your cash as much as possible and only use credit accounts when you absolutely have to. Keep them current and make sure you are actively paying them off. Control your credit; don’t let your credit control you.
What It Does
You’ve heard it before. Diversify, diversify, diversify. The reason everyone is told to diversify is because the majority of people do not have a good understanding of finances. Many millionaires have become rich by doing the opposite. They place all of their eggs in one basket. They are successful because they have a vast understanding of what basket they are using. For everyone else, diversify.
The same is true when you are trying to rapidly build credit. Rich people don’t have diverse credits because they are rich. They have a good understanding of finance and don’t need to rely on credit to get what they want or need. They simply pay for it. For those out there who need to build their credit so they can use it to receive loans then diversifying your credit accounts is essential.
Having a mix of credit accounts on your credit report is important because it shows people that you are capable of managing more than one account. This displays responsibility and control. Of course, it is only good if you are current on all of the accounts and they are all paid off. Having a couple credit cards, some utility bills, a loan or two, and any other mix of things will show people that you are financially active. This looks good because it shows that you are a reliable person who can be trusted with money.
How It Works
Having a mix of accounts will help you rapidly build credit because each of these accounts will report on a different level. For example, credit cards and utility bills will impact your score differently. Credit cards are a line of credit and utility bills are a reoccurring payment. In addition, a loan is a long-term credit payment and will also have a different impact on your credit score. If you have a variety of credit accounts then you will see a much greater impact in your score as long as you are actively paying each of the accounts.
When it comes to credit and how different credit accounts are treated, loans are usually more favorable than lines of credit. This is because it is a larger balance that is due over a period of time. Since the payments occur regularly, and over a period of time, this is a greater measure of responsibility than credit cards. The reason is you can simply not use a credit card to avoid having to make payments. However, a loan always has a payment. Therefore, if you are making the payments it has a much more significant impact.
The bottom line is that many people need diversification because they are lazy. Or they don’t want to worry about their money. If you diversify you don’t have to pay as much attention to things because it is more spread out. Win some and lose some. However, if you don’t diversify then you need to pay close attention. When millionaires invest it is often all or nothing. When regular people invest it is often in a mutual fund. When millionaires take on credit it is often done in one area. Usually huge loan amounts from banks. When regular people take on credit it is from a variety of sources. It’s up to you to decide how you want to run your financial life. In any case, some more financial education is always a benefit.
For more financial information you may wish to check out the book Relax and Unwind