How Installment Loans Affect Your Credit Score
Are you considering taking out an installment loan but unsure of how it will affect your credit? Installment loans are a different form of credit, and unlike credit cards, your monthly payments do not vary. So you must do something extremely wrong with an installment loan to have an adverse effect on your credit. Most all installment loans will help your credit score if you pay on-time. Let’s look into how they do affect your score.
The 5 Elements of Your Credit Score
You should first realize what factors make up your credit score to see how installment loans will affect it. There are five main elements:
- Payment history: 35%
- Credit utilization: 30%
- Length of credit history: 15%
- New credit: 10%
- Mixture of credit: 10%
An installment loan can fall into each category. When you apply for the loan, it’s new credit. After some time, you start to generate a credit history and it is now considered a different type of credit to add to your file. Your credit to debt utilization declines as your loan is paid, which brings you to the point of needing to pay your loan on time.
Paying Your Loan on Time
Your installment loan can affect your score positively if you pay the loan on time. As with any debt, if you do not pay it on time, creditors are quick to report this. Establishing a good history shows lenders you are a responsible borrower. So paying it on time as agreed makes you less of a risk factor when applying for new loans.
The Length You’ve Had the Loan Matters
As stated above, a good payment history helps. However, do be aware that once you have paid off an installment loan, the account closes. Lenders will look at your history, but they will see that this loan’s balance is successfully paid in full. This is why your payment history weighs more on your score than your length of credit history.
Have You Overextended Your Debt?
Another way an installment loan can impact your credit score negatively is if you appear to have too much debt. As your credit utilization weighs 30% of your credit score, you don’t want to have a high debt to credit ratio. This makes you appear risky to a lender. So only take out the amount of credit you need to use.
The above four factors are what weigh against your credit score. Your installment loan can do as much harm as good if you do not pay your loan monthly as you should.
Category: Credit Score
