I just read my credit report from and one thing affecting my score right now is that I only have “credit cards” credit. What is the next type of credit I should get to diversify this?
The next type of credit I’d suggest looking at is called a line of credit (LoC). A line of credit is similar to a credit card in that it has a fixed upper limit and you only pay interest on money you borrow. In other words, if you never use the money in your line of credit, it doesn’t cost you anything. You’ll only pay interest (or a monthly payment) once you take money from your line of credit.
A line of credit usually has a starting limit of around $5,000 to $20,000. When you need money, you can transfer money from your line of credit to a bank account. Then you can pay back the money as quickly or as slowly as you want, as long as you meet the minimal monthly payment.
Interest rates for lines of credit vary a little, but they’re relatively low compared to most credit cards. I’ve observed rates as low as 3.5% per year and as high as 12%, though most are in the range of 5% to 7%.
The benefit of a line of credit is it just sits there, not costing anything until you need it. Then, when you do use it, the interest rate is relatively low. The down side to a line of credit is banks will typically only let you transfer the money from a LoC to a bank account or credit card. You usually can’t use a line of credit to pay for things directly, like you can with a credit or debit card.
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