Ask Stacy: How Do I Diversify My Credit Portfolio?

Photo (cc) by Philip Taylor PT

I recently got the following email from a reader who apparently wants to work on his credit score by adding additional types of credit to his credit history…

Stacy,

I am trying to diversify my credit by adding another form of credit other than credit cards to my portfolio. I don’t have a car or a home, so mortgage and auto loan are out. I was told adding an installment loan could help diversify my credit. I heard of a service called an “overdraft protection loan.” It acts as a loan for when you go negative on your checking account. This service is different from other forms of overdraft protection in that it’s reported on your credit as a loan and not like a credit card.

Now the only question is where? I called all the big banks and they don’t have overdraft protection loans, only lines of credit, or overdraft protection linked to a savings account. I decided to check with credit unions. I found one that has a product called an “overdraft protection loan”. When I went into the branch I sat down with a banker and he didn’t seem to know how it was reported on my credit. He said it is revolving so its like a line of credit. Then I called the credit union’s customer service number and spoke with a loan officer and she said the same thing. I don’t think they know.

If the product has the word loan in it, I would guess that would differentiate it from a line of credit. Any help with this? I think I know what I need, I just can’t find anywhere that understands what I need so they can tell me if they offer it.
– Kevin

Here’s your answer, Kevin!

You’re right that showing different types of credit can help with your credit score – but you may be overdoing it.

According to Fair Isaac, the company behind the most popular credit score, called the FICO score, here are the components that make up your credit score, along with their relative value:

  • Payment history: 35 percent. This is essentially how well you’ve done repaying money you’ve borrowed.
  • Amounts owed: 30 percent. This is about how much you owe in total and how much you owe relative to the amount you’re approved to borrow (also known as your utilization rate).
  • Length of credit history: 15 percent. Self explanatory: how long you’ve been using credit.
  • New credit: 10 percent. The number of new accounts, especially in proportion to all credit accounts.
  • Types of credit used: 10 percent. This is what Kevin’s focusing on: the various types of accounts in your credit history, including credit cards, installment loans, mortgages, and consumer finance accounts.

The first thing to note is that adding various types of credit to Kevin’s credit history will affect only 10 percent of his credit score. So no matter how diversified he gets, it’s unlikely to move the needle much. That being said, however, it’s at least something he can do that could theoretically improve his score.

But looking for the word “loan” in the title of a banking product isn’t how to find an installment loan. All types of credit might use that word, including the type he already has. Instead, he needs to understand the types of credit.

Revolving credit: A maximum credit line is established, then the borrower draws from it in variable increments, pays it back in any amount – typically subject to minimum payments – then uses more or less of their available credit as they wish. So this is a loan that goes on indefinitely and whose payments vary with the amount used. Credit cards and home equity lines of credit are examples of this type of loan.

Installment credit: This normally begins with a lump-sum loan that is paid back (amortized) over a set period of time by making fixed, periodic (typically monthly) payments until the loan is fully repaid. So this is a loan that has specific payments, along with a starting date and ending date. The most common type of installment loans are car loans and home mortgages.

Secured credit: This is a loan secured by an asset, known as collateral: Car and home loans are examples.

Unsecured credit: Not secured by collateral: Credit cards are an example.

What’s available to Kevin?

Kevin already has unsecured, revolving credit in the form or credit cards, and he says he doesn’t to want secured credit. When he went to various banks asking for an overdraft protection loan, he was correctly told that these aren’t installment loans, they’re revolving loans: something he already has.

What’s left? Kevin needs an unsecured installment loan. He can go to a bank or credit union and take out what’s called a “signature” loan. It’s an installment loan, because it will be a lump sum, due in full by a certain date, which he’ll pay back in equal monthly installments.

The downside, of course, is that he’ll be paying interest for seemingly no other purpose than to add one additional credit source to his credit history. Worth it? I don’t know for sure, because Kevin didn’t mention his purpose. But frankly, I doubt it.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
7 Ways Coupons Waste Your Money and Time
7 Ways Coupons Waste Your Money and Time

Here’s why I hung up my scissors and quit clipping coupons.

14 Service Providers Most Likely to Lower Your Bill If You Ask
14 Service Providers Most Likely to Lower Your Bill If You Ask

With these companies, it might be easier than you think to negotiate your monthly bill down.

60% of People With This Disease Don’t Know They Have It
60% of People With This Disease Don’t Know They Have It

Millions of people overlook this potentially potent condition that tends to strike women and older adults.

The 9 Best Home Insurers for Customer Satisfaction
The 9 Best Home Insurers for Customer Satisfaction

These are the only homeowners insurance companies to earn above-average scores for customer satisfaction.

5 Ways to Save up $500,000 in 15 Years
5 Ways to Save up $500,000 in 15 Years

Even if you’re behind in preparing for retirement, there’s still a way to pull together a solid nest egg if you focus.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
10 Things Frugal People Never Buy
10 Things Frugal People Never Buy

If you’re a true tightwad, the mere thought of spending money on these items gives you the willies.

10 Useless Purchases You Need to Stop Making
10 Useless Purchases You Need to Stop Making

You might as well flush your money down the loo if you spend it on these things.

The 16 Cars Most Likely to Last 200,000 Miles
The 16 Cars Most Likely to Last 200,000 Miles

One automaker takes half the spots on a list of the longest-lasting vehicles.

7 Social Security Rules Everyone Should Know by Now
7 Social Security Rules Everyone Should Know by Now

Confusion over Social Security is a shame, considering how many of us will need this money badly.

9 Shopping Mistakes to Avoid at Costco
9 Shopping Mistakes to Avoid at Costco

Are you missing out on serious savings at your favorite warehouse club?

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

They don’t make coffee makers like this anymore.

11 Products Now in Short Supply Due to the Pandemic
11 Products Now in Short Supply Due to the Pandemic

Many goods we take for granted have become tough to find in 2021.

7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

14 Things You Should Stop Buying in 2021
14 Things You Should Stop Buying in 2021

These convenient household products come with hidden costs that you might not have considered.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

Is Writing a Check Still Safe?
Is Writing a Check Still Safe?

Every time you pay by check, you hand your bank account numbers to a stranger.

6 Ways to Protect Your Retirement Accounts From Hackers
6 Ways to Protect Your Retirement Accounts From Hackers

Imagine having $245,000 stolen from your retirement account — and not being reimbursed.

8 Things You Should Replace to Improve Your Life Today
8 Things You Should Replace to Improve Your Life Today

Being frugal isn’t smart if you put off replacing these items.

This Is the Most Dependable Car Brand in the U.S.
This Is the Most Dependable Car Brand in the U.S.

This brand’s vehicles are least likely to give drivers repair headaches, according to J.D. Power.

13 Amazon Purchases We Are Loving Right Now
13 Amazon Purchases We Are Loving Right Now

These practical products make everyday life a little easier.

7 Hidden Sections of Amazon Every Shopper Should Know
7 Hidden Sections of Amazon Every Shopper Should Know

These little-known departments of Amazon are gold mines for deal-seekers and impulse shoppers alike.

7 Income Tax Breaks That Retirees Often Overlook
7 Income Tax Breaks That Retirees Often Overlook

Did you realize all these tax credits and deductions exist — or that they apply to retirees?

7 Social Security Benefits You May Be Overlooking
7 Social Security Benefits You May Be Overlooking

There’s more to Social Security than retirement benefits.

The 6 Best Investing Apps for Beginners
The 6 Best Investing Apps for Beginners

If you’re looking to ease into investing in the coronavirus economy with just a little money, check out these easy-to-use tools.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.