One of the biggest pieces of your credit history puzzle is installment credit. If you want to maximize your credit score, you need to make sure that you have an installment loan or two under your belt.

What is an Installment Loan?

There are two main types of loans: revolving and installment. With a revolving loan, you are given a limit, and you can keep borrowing as long as you make payments and don’t exceed your limit. A credit card is an example of revolving loan.

An installment loan, on the other hand, features a set amount you can borrow, and a set payoff schedule. If you want to borrow more money later, you need to apply for another loan. Mortgages, car loans, and student loans are all examples of installment loans.

How Installment Loans Help Your Credit

An installment loan provides creditors with a record of your ability to pay. They can see a long history of paying on time, and it shows stability when you can make payments long-term.

Another reason installment credit is important is due to the fact that these types of loans often feature bigger payments. It’s one thing to be able to make a $50 minimum payment on a credit card each month, and quite another to be able to make a $300 car payment or a $1,000 mortgage payment. Having an installment loan shows that you can handle different types of credit, and that you can be trusted to arrange your finances so that you can meet these bigger obligations.

When it comes to your credit score, about 10 percent relies on the type of credit you have. That means that a portion of your score depends on your “credit mix” — your mix of revolving credit and installment credit.

You can boost your credit by having installment credit as well as revolving credit. This doesn’t mean that you have to bind yourself forever, though. A personal loan from your bank, paid back over two or three months, can be an installment loan. You can also get a car loan for 24 months, and pay it back early.

It’s important that you don’t use your effort to boost your credit as an excuse to get loans you can’t afford. The most important aspects of your credit score are still payment history and credit utilization, so it might not make sense to get an installment loan just for the sake of an installment loan — especially if you know you’ll be paying a high interest rate. Consider your individual financial situation, and make decisions based on what is likely to work best for you.

Posted by:  Carlson Mortgage – a St. Louis mortgage broker.  Our Home Loan Experts can be reached at (314) 329-7314 seven days a week. Let us be your source for some of the lowest mortgage interest rates in St. Louis on conventional, FHA, Veterans (VA), USDA, Jumbo and HARP 1.0 and 2.0 loans. We have 10 years of experience providing mortgage services in St. Louis that are tailored individually to your unique needs and to your financial situation. We speak English, Spanish and Russian. Call us today to inquire about interest rates or if you have any mortgage questions. 

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