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When your credit score is figured, one of the factors is the types of credit accounts you have. While this factor only accounts for about 10 percent of your score, it can still be enough to nudge your score a little higher or a little lower.
As you manage your credit, it’s important to understand the difference between installment accounts and revolving accounts. Not only can this be helpful knowledge as you manage your credit, but it can also be useful for your finances.
An installment account is one that involves a regular payment. These types of loans have a set start point and end point. If you want to borrow more, you have to apply for another loan.
Installment credit is an important aspect of your credit score because it shows that you can maintain a payment over time. Examples of installment loans are car loans, mortgages, and student loans. Some personal loans and P2P loans are also installment loans.
A major installment loan, like a mortgage, can be especially helpful to your credit situation. If you can make a mortgage payment each month, it shows creditors that you are responsible, and that you have the finances to handle payments long-term. This is why a regular, on-time mortgage payment is so important to your credit.
On the other hand, revolving credit is marked by the ability to continue to borrow from a line of credit. A good example of a revolving account is a credit card. You have a credit limit, and as long as you keep making payments on the card, you have credit available to you. Another example of revolving credit is a home equity line of credit. You can borrow up to a certain amount, based on the equity in your home, and you don’t have to apply for another loan in order to borrow more – as long as you make regular payments that free up more room.
Revolving credit is an important part of your overall credit history as well. Revolving credit shows that you can manage your finances in a way that is sustainable. Revolving credit is a big part of the credit utilization portion of your credit score – which accounts for about 30 percent of your credit score. If you carry high balances, maxing out your revolving accounts, it can drag on your credit score.
Having a good mix of revolving accounts and installment accounts is an important part of a good credit score. When you have both types of accounts, it shows that you are capable of managing your money on different levels, and it reflects well in your credit history.
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