Having a mix of credit products in your name — such as a couple of credit card accounts and a mortgage or auto loan — helps to strengthen your overall credit profile.
These credit products fall under two main categories: revolving credit and installment credit. Lenders like to see that you have both because it shows them you can manage the many different obligations that come with borrowing all kinds of debt.
While these two kinds of credit are different, one is better than the other when it comes to improving your credit score. No matter the size of the balance, the interest rate or even the credit limit, revolving credit is much more reflective of how you manage your money than an installment loan.
Below, CNBC Select spoke to a credit score expert to understand the difference.
To maintain a good credit score, it's important to have both installment loans and revolving credit, but revolving credit tends to matter more than the other.
Installment loans (student loans, mortgages and car loans) show that you can pay back borrowed money consistently over time. Meanwhile, credit cards (revolving debt) show that you can take out varying amounts of money every month and manage your personal cash flow to pay it back.
Lenders are much more interested in your revolving credit accounts, says Jim Droske, president of Illinois Credit Services. So while you may have a large auto loan of over $20,000, lenders look much more closely at your credit cards — even if you have a very small credit limit.
"Assuming both obligations are always paid as agreed, a credit card with a $500 limit can have a greater impact on your credit scores versus a $20,000 auto loan," Droske tells CNBC Select.
It's important to pay both bills on time each month, as on-time payments make up 35% of your credit score. But only credit cards show if you'll be a reliable customer in the long run, he explains. Because your balance is constantly in-flux, credit cards demonstrate how well you plan ahead and prepare for variable expenses.
"Credit scores are predicting future behavior, so the scoring models are looking for clues of your good and bad history," Droske (who has a perfect credit score) says.
With a credit card, your balance could be under $1,000 in one month, then three times as large the next. If your history shows that you manage your money consistently enough to cover varying costs, then lenders know you're probably reliable enough to borrow more money in the future.
Having both an auto loan and a credit card in your name will impact your credit score, but the revolving credit account (your credit card) will play a bigger factor in your score's calculation. Here's why:
If you don't have any credit accounts in your name, and you want to build your credit history, it's best to start with a credit card designed for newcomers.
First, the Petal Visa card allows applicants with no credit history to apply, and there are no fees whatsoever. It also has a rewards program meant to help you establish good credit habits: 1% cash back on eligible purchases, which can increase to 1.5% cash back after you make 12 on-time monthly payments. This is a great perk that can get you in the routine of making monthly bill payments on time.
Another card to consider is the Capital One® Secured, which has a low security deposit (learn how secured credit cards work) and the Capital One® Platinum Credit Card, which is good for applicants with average credit.
At the end of the day, the most important factor is that you use your credit products to your advantage. Feel free to charge expenses on your credit card to earn points or cash back; just make sure you can pay the balance off in full by the time the bill comes. The same goes with installment loans like personal loans, car loans and mortgages.
"In the long run, always pay your installment loans on time," Droske says.
Information about the Capital One® Secured, Capital One® Platinum Credit Card, and Petal® Visa® Credit Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.