In the realm of personal finance, it’s important to understand your options when it comes the type of credit you can have. While there is a plethora of information available to demystify credit and its various elements, two of the most important forms of credit you must understand are installment and revolving credit.
What is Installment Credit?
In a basic sense, installment credit is credit that has a specific number of monthly payments. Examples of such forms of installment credit is home mortgages, auto loans, student loans, personal loans and any other type of loan that features a specific amount and payoff date.
In terms of your credit report, installment credit debt affects your score in very specific ways. One of the biggest questions consumers have regarding installment credit is the affect it has on your credit score after it’s been satisfied. These loans are most likely reported to all three major credit bureaus, therefore all account activity is reflected on your credit report.
Installment debt affects your credit report in a different way than other forms of debt because outstanding balances are often secured via some form of asset. For example, with a home mortgage your home is your asset. Since this form of credit is often more stable, it’s influence on your credit score is minimal. This is why paying off an installment loan early rarely boosts your credit score. Therefore, it’s far more important to focus on making on-time payments rather than paying off the balance early. Even with hundreds of thousands of dollars of installment debt, you can achieve a credit score over 700, according to VantageScore.
What is Revolving Credit?
Revolving credit is far more common than installment credit. In a nutshell, revolving credit is any credit line that doesn’t have a fixed number of payments, which is the opposite of installment credit. The clearest example of this type of debt is credit cards. While you have a monthly payment as long as there is a balance, as soon as it’s paid off the credit line is not closed. Basically, this form of credit can be withdrawn, repaid and then withdrawn again. As long as you keep your balance under you credit limit, you can repeat this cycle over and over again.
In terms of your credit score, revolving credit is among the most powerful elements. Because of this, it’s essential that you not only pay your payments on time, but also keep your balance below your credit limit. Doing so can cause a substantial boost to your credit score. If you are curious about what credit score is needed to buy a house please contact us.