|INSTALLMENT VS REVOLVING CREDIT: YOU NEED BOTH|
|Posted on: Aug. 01, 2017 in Uncategorized|
This is the last part in our series about how understanding your credit score can help you raise it. We’ve covered payment history, the amount of debt you have, the length of your credit history, and new credit. The final piece of the puzzle, making up about 10% of your score, is the type of credit accounts you have.
There are two types of credit. If you want to boost your score, you’ll want to have some of each.
Installment credit is what we usually think of when we think about loans. Mortgages and auto loans are two great examples. With an installment loan, you borrow a set amount of money and then you make regular payments, usually monthly, for a set period of time. There are pre-determined beginnings and endings to installment loans.
Installment loans look great to lenders because they show that you can make regular payments on a long-term basis. Handling this ongoing payment shows you’re a responsible borrower in a way that revolving credit cannot.
Revolving credit is different from installment credit because there’s no set time period or payment. Instead, you’re given a line of credit and you can borrow up to the limit when you want. You can buy something with your credit and then pay it off immediately or pay it off over time. You’ll often need to make a minimum payment based on the total amount outstanding at any given time, but you’re free to borrow more (up to that limit!) or pay off more at your own discretion. Credit cards and home equity lines of credit are two typical examples of revolving credit.
With revolving credit, it’s likely you won’t have the same monthly payment due, so it takes a little different mindset to manage your finances. Your budget has to be able to handle the fluctuations and you have to be careful not to spend more than you can afford at any given time.
Because both highlight different strengths of the borrower, having some of each included in your credit history shows that a lender can trust you to pay back what you borrow, thus raising your score.
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