What’s the difference between installment credit accounts and revolving debts? The answer impacts your credit score and/or the way a potential lender evaluates your financial picture. Let’s unpack these credit buckets.
Installment credit is a loan that offers a borrower a fixed, or finite, amount of money over a specified period. Examples are a car loan, student loan, and mortgage. The borrower knows upfront the number of monthly payments, also called installments, that they will need to make and how much each monthly payment will be. Few scenarios can change the agreement, one being a forbearance, which is a temporary allowance to delay payment on the account for a set time period.
How installment credit accounts impact your credit score: Because each loan on your credit report is included in your credit history, it helps to have an installment loan to show a variety of credit accounts and to add to the longevity of your credit history. But it is worth noting that the actual balance of your installment loan is not a big factor in your credit utilization rate, the ratio of how much you owe to the amount of available credit.
In contrast to installment credit, revolving credit accounts extend to a borrower a line of credit with no determined end time, and they can spend up to their assigned credit limit. The biggest example of revolving debt is a credit card.
How it impacts your credit score: As with installment accounts, it is critical that you pay your monthly revolving credit bills on time in order to maintain an optimal credit score. Another key point is to keep your balance at less than 30 percent of the credit limit. For example, if your credit card has a credit spending limit of $5,000, keep the balance less than $1,500 when you roll over to the next month’s reporting period.
Connect with Scorewell today to discuss factors that determine your credit score and strategies to improve your financial picture.