What is a potential consequence of having only one type of credit?

• A. Improvement in credit score
• B. Potential harm to credit score
• C. No effect on the credit score
• D. Borrowers will receive lower interest rates

Answer: (B)

Having only one type of credit can potentially harm a credit score due to a lack of credit diversity. Credit scoring models typically look for a mix of credit types, such as revolving credit accounts (like credit cards) and installment loans (like car loans or mortgages). This mix demonstrates a borrower’s ability to manage different types of credit responsibly.

When an individual has only one type of credit, it may indicate limited credit management experience, which can be viewed negatively by lenders. This lack of variety can also affect the credit utilization ratio and how well one can handle different payment obligations. Consequently, it may lead to a lower credit score, making it less favorable for future lending opportunities and possibly resulting in higher interest rates on any new credit.