19
Aug

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Lenders use credit reports and credit scores to determine your credibility and trustworthiness when you apply for credit or a loan. Many aspects of your debt – your debt history, your debt behavior, and the amount of your debt – determine how you will be evaluated by these lenders.  In this way, the loans and credit that you already hold determine the loans and credit you may qualify for in the future.

 

But did you know that your loans and credit come in two types, and each type affects your credit score differently? On your credit report, your accounts are either classified as revolving credit or installment credit. Read on to find out what that means for your credit:

 

Revolving Credit

 

Revolving credit accounts typically do not have a set payment amount or a beginning or end date associated with repayment. The best example of revolving credit is a credit card. Revolving credit accounts have a credit limit, but otherwise your ability to borrow against this credit line is relatively unrestricted. Another example is a home equity line of credit, on which you can borrow against the equity in your home.
On your credit report, revolving credit accounts measure your ability to responsibly borrow continuously from a line of credit.

 

Installment Credit

 

Installment credit, on the other hand, generally involves a recurring payment of a set amount (which can be re-calculated, but not on the same frequency as a credit card). There is also a predetermined beginning and end point for the loan. Unlike revolving credit, borrowing more would involve applying for another loan.
Installment credit demonstrates your ability to maintain payments over a long period of time. Examples of installment loans include car loans, mortgages, and student loans.

 

On your credit report, installment credit measures your ability to manage set payments over a long period of time.

 

How They Affect Your Credit Score

 

Missed or late payments will do major damage to your credit regardless of loan type. As payment history is the largest contributing factor to your credit, your top priority should be to make all payments on time. Good payment history for both loan types will benefit your credit score.

 

In addition, a healthy mix of loan types benefits your credit score. Maintaining on-time payments for both revolving and installment credit helps your credit score and shows that you can handle both types of loans responsibly.

 

However, when it comes to credit utilization – which measures how much of your available credit you are using for debt – only revolving loans count. Since installment loans don’t have freely available credit for you to borrow against, they don’t factor into this calculation. With credit cards and other types of revolving loans, aim to keep your balance below 30% of the credit limit. As credit utilization is a large factor of your credit score, keeping your revolving credit below this threshold will prevent unnecessary damage to your credit.

 

 

Conclusion

 

For credit reports, loans come in two types – revolving and installment. To fully maximize the effects of both types on your credit, you should hold a mix of revolving and installment loans to demonstrate that you can responsibly manage both. When it comes to credit utilization, keep your usage of revolving loan types under 30%. Lastly, maintain regular, on-time payments for both loan types.

 

 


Posted in Credit