Understanding how an installment loan affects your credit score can be a bit tricky. These types of loans are far different than other unsecured debt which affects your credit. Installment loans are relatively stable types of debt that have a fixed payment schedule over a set period of time. So, where your credit card balance may fluctuate, and directly impact the length of time that you will be paying on that card, an installment loan has a very clear ending as long as payments are made responsibly. Excellent examples of installment loans are mortgages and automobile loans.
How Installment Loans Differ from other Debt
Installment loans certainly affect your credit, and if you make your payments in a timely manner, you will see a gradual, steady improvement in your score. However, the improvement isn’t profound initially, even if you pay off a significant balance early. Why? Well, an installment loan is generally tied to collateral, which is important to your life. For instance, with a home mortgage if you quit making your payments, your home – the loan’s collateral – will eventually go through foreclosure. If you neglect to make your car payments, your car will eventually be repossessed. Obviously, most people do all that they can to keep these terrible events from happening.
However, when dealing with other kinds of debt, such as credit card payments, a borrower shows their true meddle. You see, if you get behind on a credit card, you may accrue late fees and lower credit ratings, but it isn’t likely that you’ll lose anything immediate and significant in your life. As a result, the first bills left unpaid are these unsecured debts.
Risk Predictors
Because of the inherit differences between installment loans and other kinds of debt, they impact your credit score differently. Both typically are documented on your credit report, as well as how well you make your payments. However, because credit card debt carries fewer immediate consequences if you fail to pay responsibly, they are better risk predictors. The thought process is that if you pay these kinds of debt the way that you should, you are a pretty good lending risk to take.
While installment loans do affect your credit score, you won’t see as much quick progress with these types of debt as with paying other unsecured debt responsibly. However, gradual improvement will be seen over time. Certainly, if you pay your installment loans in a timely manner, they won’t have a negative impact on your score.
