How Credit Types Impact Your Score: Installment vs. Revolving & More

Yes, the types of credit you use significantly impact your credit score. Lenders and credit scoring models, like FICO and VantageScore, evaluate not just how you use credit, but also what kind of credit you manage. This is because effectively handling different types of credit demonstrates a broader capability in financial responsibility. Think of it like diversifying an investment portfolio; a healthy credit profile often includes a mix of different credit types.

The primary credit types that influence your score fall into two main categories: installment credit and revolving credit. Understanding the nuances of each is key to building a strong credit history.

Installment Credit: This type of credit is characterized by fixed, regular payments over a set period. Think of loans like mortgages, auto loans, student loans, and personal loans. When you take out an installment loan, you borrow a specific amount and agree to repay it in equal installments, including interest, over a defined term (e.g., 30 years for a mortgage, 5 years for a car loan).

How installment credit affects your score:

• Positive Impact: Responsible management of installment loans is generally viewed positively. Making consistent, on-time payments on these loans demonstrates your reliability in handling larger financial commitments. This positive payment history is the single most influential factor in your credit score. Successfully paying off an installment loan also shows completion and responsible debt management. Furthermore, having different types of credit, including installment loans, contributes to a healthy credit mix, which is another factor considered in your score.
• Negative Impact: Missed or late payments on installment loans can severely damage your credit score. Defaults or accounts sent to collections will have a significant negative impact and can stay on your credit report for up to seven years. Taking out too many installment loans in a short period might also raise a red flag, suggesting potential overextension, though the impact is usually less than that of revolving credit misuse.

Revolving Credit: Revolving credit is more flexible and ongoing. Credit cards and lines of credit are prime examples. With revolving credit, you have a credit limit, and you can borrow and repay funds repeatedly, up to that limit. You are billed monthly, and you have the option to pay the full balance or a minimum payment. Interest accrues on any unpaid balance.

How revolving credit affects your score:

• Positive Impact: Responsible use of revolving credit is crucial for building a good credit score. Making timely payments and keeping your credit utilization ratio (the amount of credit you’re using compared to your total available credit) low are key. A low credit utilization ratio, ideally below 30%, shows lenders you are managing your credit responsibly and not over-reliant on borrowed funds. Consistent, on-time payments on credit cards are a strong positive signal.
• Negative Impact: Revolving credit carries more potential for negative impact if mismanaged. Maxing out credit cards or having high credit utilization significantly hurts your score. Late payments on credit cards are also heavily penalized. Opening too many credit card accounts in a short period can also negatively affect your score, as it may suggest you are taking on too much credit too quickly. Furthermore, closing old, established credit card accounts, especially those with long payment history and low utilization, can sometimes negatively impact your score by reducing your overall available credit and potentially increasing your credit utilization ratio.

Other Types of Credit:

While installment and revolving credit are the most common, other types of credit also play a role:

• Mortgages: Mortgages are large installment loans specifically for purchasing property. Positive mortgage payment history is a strong indicator of creditworthiness.
• Student Loans: Similar to other installment loans, responsible repayment of student loans is important for your credit score.
• Retail Credit Cards (Store Cards): These are often easier to obtain but typically have higher interest rates. While they can help build credit, they should be managed carefully, just like any other revolving credit.

In Summary:

Different types of credit influence your score in various ways, mainly through their impact on payment history, amounts owed (especially credit utilization for revolving credit), and credit mix. A healthy credit profile often includes a mix of both installment and revolving credit, managed responsibly. Focus on making timely payments, keeping credit utilization low on revolving accounts, and avoiding taking on excessive debt across all credit types to maintain and improve your credit score. Diversifying your credit portfolio responsibly, by demonstrating you can handle different types of financial obligations, can ultimately lead to a stronger and more versatile credit history.