10 Types of Debt That Can Help Your Credit

A credit score plays a massive role in a person's prospects for obtaining financing. How high or low your credit score is will determine if you're approved for things like a rental property, loan, or credit card, and at what rate. Having a good credit score means you have more access to favorable financing terms, pay lower interest, or need to put less money down to obtain financing.

While most people don't think of using debt to boost your credit score, strategic use of certain debt can do wonders for one. Here is a closer look at 10 types of debt that you can help improve your credit score.

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One of the best types of debt to take on in terms of improving a credit score is real estate because it's a reliable way to show payment history. Rent payments are rarely reported to credit bureaus, meaning no matter how great of a tenant you were when rent was due, it wasn't reflected in your credit score. A mortgage payment, however, is reported to the credit bureaus, meaning even a few months of pay history will dramatically improve your credit score.

ALSO READ: 6 Ways to Invest in Real Estate With a Low Credit Score

If you already have a home loan and are looking for ways to further boost your score, consider taking out an equity line of credit. This revolving line of credit allows you to draw from your property's equity up to a certain amount as needed.

While you can certainly use this money to make improvements to the home or to help pay for other unexpected expenses, it's ideal to simply have the line of credit open because it increases your credit limit. The higher your credit limit, while still maintaining low credit usage, the better your score.

A student loan can be a solid way to build credit history because, like a home loan, it's an installment loan that allows you to build credit history with each on-time payment you make. Plus, if used wisely, hopefully the debt will help you secure a higher-paying job than would have been available without your degree, making you more likely to maintain and pay your debts.

ALSO READ: Why Are Fewer People Going to College Right Now?

If you're just getting started building your credit, a car loan can be a wonderful way to build credit history. Like a home loan or student loan, car loans are considered an installment loan that can allow you to diversify the type of credit you have outside of things like credit card debt, which is revolving credit. It's ideal to have a solid mix of credit types to help boost your credit score, and given that most people need a car to get around, this is an ideal stepping-stone to get there.

Car loans aren't the only type of vehicle loan that can boost your credit score. You can also obtain a loan to buy things like a motorcycle, boat, or even an RV to improve your score. Like with a car, these installment loans can help build payment history as long as payments are made on time.

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A personal line of credit -- in which you take out a loan with a bank or lending institution and repay the debt in installment payments over time -- can also help raise your credit rating. Taking out a personal loan can help increase your available credit, and if needed, can be used to pay off higher-interest debt while you build your payment history.

If you operate a business, a business loan can be a valuable way to not only expand your business but also improve your credit. Most banks will require personal guarantees with bank loans in addition to some sort of collateral. Meaning, all on-time payments made from your business could make a small, but notable, impact on your credit score, too.

Refinancing a car loan or home loan can be another way to boost your credit score by a few points. Showing payment in full on a line of credit, particularly a large one, does wonders for your credit score because it shows creditors you're able to repay your debt obligations as contracted. While you'll be taking out a new loan at the end of it, your credit score will certainly be better because of it.

ALSO READ: 3 Reasons You Should Refinance Your Mortgage Right Now

You might be surprised to see credit cards on this list, but strategic use of credit cards can do wonders for a credit score. Each card you hold increases your credit limit, which helps your credit score. As long as the balance is paid off each month, having one or several credit cards can boost your credit score.

The key is to make sure you don't carry a balance. If you keep a high revolving credit line, meaning the amount of debt sitting on your credit card unpaid each month, a credit card will do more damage than it does good.

As previously mentioned, having more debt available to you while still maintaining low credit utilization improves your credit score. Rather than taking out new loans or credit cards, simply ask for your current lenders or creditors to increase your credit limit.

Most companies that you have an established credit history with will approve your request for an increase. But the higher your credit score is to begin with, the more credit you're likely to get approved for.

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Debt is one way that you can improve your credit score, but it's important to choose your lines of credit carefully and always manage your debt responsibly. Overspending on a line of credit or credit card or taking on too large of a mortgage means you're increasing your debt-to-income ratios or putting yourself at risk for defaulting on payments -- which isn't good for your credit score.

Making payments on time is one of the greatest impacts to your credit score, but the length of time the credit has been open and your credit utilization are also big determining factors. Aim to keep your active debt outstanding, commonly referred to as revolving debt, less than 25% of your total available credit. It's also to important to remember that taking out too many new loans or opening too many credit cards close together can actually hurt your score before it improves it.

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