A healthy credit report contains a variety of credit accounts, such as revolving credit (think credit card) and installment credit (like an auto loan).
Both types of credit can have a significant impact on your credit score. Here’s a breakdown of revolving credit and installment credit, and how each can affect your credit.
Revolving vs. installment credit
Revolving credit isn’t issued in a predetermined amount. Credit cards are the most common form of revolving credit. You’ll have a limit on how much you’re able to borrow, but the amount you use within that limit is up to you. Most revolving loans are issued as lines of credit, where the borrower makes charges, pays them off, then continues to make charges.
Installment credit comes in the form of a loan that you pay back in steady payments every month. The amount of the loan is determined at the time you’re approved, and the sum you’ve borrowed doesn’t change over time. Examples of installment credit include mortgages and car loans.
How revolving credit affects your credit score
Payment history: It’s the single biggest factor on your credit score, so it’s crucial that you make all monthly payments on time. Any missed payments will have a big drag on your credit score.
How much you borrow: A significant portion of your score comes from the total amount that you owe. A big variable is your credit utilization ratio, which is how much you owe on your cards compared with your available credit.
Most credit scoring models penalize you for using over 30% of your available credit. But in many cases, the balances on your installment loans aren’t factored into this ratio. In fact, installment loans have a much smaller impact on this portion of your credit score.
How installment credit affects your credit score
Installment credit is a little more straightforward than revolving credit.
Payment history is a big factor. As long as you make all payments on installment credit accounts on time, you’ll be making good progress on improving your credit score. Likewise, any missed payments will have a significant negative impact on your credit.