Credit comes in many forms, from credit cards to auto loans to mortgages. But what type of credit is the most important for consumers to establish and maintain? The answer depends on your financial situation and goals. For most people, there are a few key types of credit that provide the greatest benefits.
Establishing Good Credit History
When you’re just starting to build credit, the most important thing is establishing a positive credit history. This means using credit responsibly by making on-time payments and keeping balances low. A good payment history on basic accounts like retail store credit cards, auto loans, or a credit builder loan demonstrates that you can handle credit well.
Having a variety of credit types and a longer history typically helps your credit score. Length of credit history accounts for about 15% of a FICO credit score. If you’re new to credit, be patient and focus on consistently paying accounts on time. After about 6 months of responsible credit use, you’ll start establishing a good base.
Credit Cards for Everyday Purchases
For daily spending and purchases, credit cards are the most important credit tool. A rewards credit card that you pay off each month allows you to build credit with no interest. Using credit cards for everyday purchases builds your payment history and credit mix without financing costs.
The key is choosing cards with valuable rewards and no annual fees. Cash back credit cards offer statement credits for a percentage of purchases. Travel rewards cards earn points or miles that can be redeemed for flights and hotel stays. Grocery and gas rewards cards provide bonus rewards for purchases in those categories. With responsible use, a rewards credit card provides significant benefits.
Auto Loans and Installment Credit
Installment loans like auto loans and personal loans are also an important part of your credit mix. Installment accounts require regular monthly payments like a mortgage or student loan. Having experience with installment credit shows lenders that you can manage a long-term loan commitment.
An auto loan is often one of the first installment loans that new credit users take out. Paying an auto loan on time for several years demonstrates installment loan management skills. For larger purchases like furniture or home improvements, a personal loan may also help build this type of credit history.
Student Loans Build Credit Depth
Federal and private student loans provide another long-term installment account that builds your credit profile. Student loans have relatively low interest rates and allow deferred payments while in school. They require regular payments over a decade or more after graduation.
Having student loans on your credit history provides creditors with information about your long-term payment habits. It shows you can manage a large credit commitment over many years. Paying down student loans also improves your credit utilization rate. Like other installment loans, handling student loans responsibly is key for credit scoring.
Mortgages for Major Purchases
For major expenses like buying a house, a home mortgage is one of the most useful credit products. Mortgages offer very low interest rates and long repayment terms. They provide opportunity to build substantial equity in an appreciating asset over time.
Obtaining a mortgage has strict approval requirements, so this represents an important credit achievement. Having a mortgage on your credit history demonstrates that a lender reviewed your finances thoroughly and approved you for a large long-term loan. Successfully making mortgage payments over years shows a deep credit history with responsible major credit use.
Business Credit for Companies
For small business owners, establishing business credit is extremely valuable. Unlike personal credit, business credit is linked to the company’s Employer Identification Number. This credit profile will be used to approve financing that the company applies for.
Some important ways to build business credit are getting a credit card in the company name, obtaining a business loan or line of credit, leasing equipment, and establishing trade credit accounts with suppliers. Taking steps to actively build business credit makes it easier to qualify for funding to support growth.
Credit Builder Loans
For those with very limited credit history, a credit builder loan can be the most effective way to establish a strong payment record. Credit builder loans work by placing the loan funds into a savings account as collateral. You make monthly payments to pay down the loan balance.
Once the loan is repaid, the money in the savings account is released to you. Credit builder loans allow you to build positive credit events while also earning interest on the collateral savings account. This helps strengthen your credit score profile to qualify for prime loans.
Authorized User Accounts
Being added as an authorized user on someone else’s credit card is an easy way to piggyback on their positive account history. The primary cardholder’s payment activity gets added to your credit reports. This can provide a fast credit score boost by immediately adding a long positive account.
However, authorized user accounts have risks. If the primary cardholder makes late payments, that will negatively impact your credit too. And removing you from the account will delete its entire history from your reports. Use authorized user status cautiously if you have the option.
Secured Credit Cards
Secured credit cards require an upfront security deposit that serves as your spending limit. The deposit protects the issuer from default risk. Secured cards allow consumers with poor or limited credit histories to demonstrate responsible account management. After about a year of on-time payments, the account may upgrade to a regular unsecured card.
Having a secured card can help establish recent positive credit events when your history is sparse. Make sure the card issuer reports your activity to the major credit bureaus so it contributes to building your scores. Be prepared to transition to an unsecured card when possible to avoid fees.
Retail Store Credit Cards
Retail credit cards that can only be used at one merchant may seem limited. However, opening a store credit card is an easy way to start building positive payment history. Store cards tend to offer generous initial spending limits and approval to applicants with limited credit.
The key is to use the card moderately and pay off balances consistently. After about 6 months of on-time payments, the account will strengthen your credit profile. At that point, you can apply for more general rewards cards with better benefits.
Credit Utilization Rate
Across all credit accounts, keeping your balances low compared to limits is ideal. This revolving credit utilization rate is a key factor in credit scoring. Maintaining a utilization below 30%, and optimally less than 10%, avoids overusing available credit.
Letting one card balance spike from purchases can jeopardize scores even if other accounts are paid off. Monitoring total revolving usage helps maximize credit opportunity while building your profile responsibly.
Credit Mix Matters
Having diverse credit types in your file such as credit cards, installment loans, and a mortgage improves scoring if managed prudently. Different accounts demonstrate you can handle a variety of credit lines and lending terms.
However, don’t open accounts solely for mix diversification. Only apply for loans and cards you actually need and will benefit from based on spending patterns. Accounts opened solely to influence scores often backfire with additional costs.
Avoid Payday Loans
Payday loans enable fast cash access between paychecks. However, they have extremely high fees and APRs often exceeding 400%. Payday loans must be repaid quickly and tend to create cycles of reborrowing for consumers. They should only be used as an absolute last resort in financial emergencies.
Relying on payday loans long-term makes scores suffer severely. The mix of new loan inquiries and default risk from payday borrowing destroys scores. Building credit effectively requires avoiding payday and title loans whenever possible.
Beware of Credit Repair Agencies
Many companies advertise overly quick or simple credit score fixes. Most don’t provide lasting results and charge ongoing fees. Effective credit improvement requires building positive history over 6-12 months using responsible financial habits.
Some tactics like filing disputes may temporarily help credit reports. But if negative items are valid, they often return quickly. Sustainable credit building relies on consistently demonstrating prudent use of new and existing accounts.
Check Credit Reports First
Before applying for new credit, always check your credit reports from Equifax, Experian and TransUnion. This ensures there are no mistakes negatively impacting your scores. If errors exist, file disputes and provide validating evidence so they can be removed.
Starting with clean and accurate credit reports allows new positive account history to improve your scores. Be sure to check reports from all three bureaus since they may contain different information.
The Most Important Credit Depends on Needs
Here is a summary of credit types that are most important based on various consumer financial situations and needs:
| Situation | Most Important Credit |
| Limited credit history | Retail store credit cards, credit builder loans, authorized user accounts |
| Daily spending and purchases | Rewards credit cards paid off monthly |
| Major purchases | Auto loans, student loans, mortgages |
| Business funding needs | Business credit cards, equipment leasing, business loans |
| Poor/fair credit | Secured credit cards, credit builder loans, authorized user accounts |
| Credit improvement | Mix of positive account types, keep balances low |
Conclusion
The most important credit accounts depend largely on your current situation. For new credit users, retail accounts and authorized user status build initial history. Rewards credit cards provide everyday spending benefits with responsible use. Major installment loans like auto, student loans and mortgages demonstrate long-term management skills.
Business credit aids company funding when built strategically over time. Those rebuilding credit after issues benefit from secured cards and credit builder loans initially. The key across all profiles is using credit thoughtfully, monitoring reports frequently, and letting positive habits develop over years to maximize scores.