If you know the basics about how your credit score is calculated and what factors go into if it is increasing or decreasing, then it is time for you to learn even more. In this article we are going to go over Revolving Versus Installment Credit and how it affects your credit score. You might be under the assumption that all debt is created equal, but this is far from the case and not knowing this can cost you in the long run.
– Revolving Credit: This is credit where there is not the same fixed amount owed e
very month. Normally with revolving debt, you will be limited to how much debt you have outstanding like as seen on a home equity line of credit. There is a cap to how much you can have borrowed at one time whether it be $10,000, $20,000, etc. The thought process with revolving credit is that you will use up credit for purchases and then turn around and make payments towards these purchases the next month. In the event you don’t pay for your purchases in full, you will incur an interest charge. Besides home equity lines of credit or HELOCs, you can see revolving debt in your credit cards.
– Installment Credit: This is credit where a fixed amount is borrowed and it is amortized over a certain length of time with every payment being exactly the same for the life of the loan. The amount of your monthly payment will be determined by the interest rate you receive and the amount of years for payback. Examples of these types of loans can be seen by mortgages, auto loans, and student loans on standard amortization schedules.
Where you can get in the most trouble with Revolving Versus Installment Credit is if you abuse the Revolving Credit. Unlike Installment credit where you know your payment will be the same every month, revolving credit can change on a monthly basis. For example your minimum payment on a $10,000 HELOC could be $40, while a minimum payment on a $40,000 HELOC could be $170. As you can see, if you are not careful your payment can double and triple on you just to cover the monthly interest charge. If you don’t auto-pay your monthly payments and you don’t pay enough or miss a payment, you will be in trouble and your score will suffer.
Another way to drive your credit down with revolving credit is to use up to the max of the credit offered. Whether it be a credit card or HELOC, using more than 30-50% of your available credit will negatively affect you as your credit utilization will be high. Credit utilization can easily decrease your score 20-50 points for maxing out a couple credit lines.
Installment credit on the other hand has a minimal impact on your credit score and the most damage occurs when the debt is issued, but as you make monthly on-time payments, you will see your credit score increase. Doing this will also build a good history of paying your debt in a timely manner.
As you can see there are differences in Revolving Versus Installment Credit and hopefully you are now more informed as to how you can damage your credit if you are not careful. If you have any questions on this please feel free to reach out at 888-900-1020, visit my website at www.loanconsultants.org, or visit our credit repair website www.creditfixadvisors.com.