Installment Loans Vs Revolving Debt

The following is a featured article by Clint Finley.

Credit. Ah, it’s so much fun trying to understand it, improve it, and keep it at a high level. Well, maybe fun isn’t the correct word here. Perhaps, a real headache is the best way to explain it. Not only are there different components of your credit history that affect your score in different ways, such as the length of time since you’ve established credit and how well you pay your bills, but there are actually different kinds of credit. Yep, there are different kinds and they affect your score in different ways, too.

Ten Percent of Your Score is Based on Types of Credit Used

Credit scores are figured through many different factors. One of these factors is the different kinds of credit you have on your report. You may have too much of one and not enough of another. Paying off one kind quickly can give your score a big boost while paying off another quickly may not even be reflected. These two credit types are installment loans and revolving debt.

  1. Installment loans: This type of credit is very defined. You should have a very specific number of payments and a set payment amount. Typically, these are loans that are paid back over a set period of time. Great examples of installment loans are those that carry collateral, such as a home mortgage and an automobile loan. However, both secured and unsecured personal loans usually fall in this category, as well.
  2. Revolving credit: This kind of credit does not have a specified ending date, nor does it have a set number of payments. Rather, revolving debt is available to the consumer at any time so that the balance can change exponentially, quickly. Credit cards are probably the most common type of revolving credit. The payment amount changes with the balance, and the length of time spent making payments does, as well. Another kind of revolving credit is a home equity line of credit.

How Does Each Type of Credit Affect My Score?

It isn’t recommended to have five credit cards, or revolving credit, and no installment credit on your report. Rather, it would be ideal to have an equal mix of the two. So, if you have a credit card and home equity line of credit, you’re well balanced. That’s a positive for your report and your score. Also, paying off large chunks of revolving credit at a time will improve your score more than paying off substantial installment loans quickly.

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