Chances are when you're reviewing your credit reports you'll see terms you don't tend to use in daily life. This can make for a confusing time trying to understand what's what, especially when you're looking for errors that might be dragging your credit scores down. "Installment account" is one such term you might find. Read on to learn what an installment account generally refers to and what that might look like on your credit reports.
What is an installment account?
An installment account is a loan, which is to say it's credit you take out that has to be paid off over time with a set number of scheduled payments. Just like its name, the loan is paid off little by little each month in installments. Once the loan is paid off, the account will typically be considered closed.
Some installment accounts you may be familiar with include mortgages or auto loans and even student loans. You can also take out a debt consolidation loan or a personal loan, which are generally considered installment accounts as well.
A credit card, on the other hand, is a revolving account. A revolving account typically is a line of credit that can be borrowed from repeatedly as long as the credit limit hasn't been hit. And even though it will come with minimum payments due each month, there's generally no set time by which it has to be paid in full.
How installment accounts may affect your credit.
There are a few ways an installment account can affect your credit. According to FICO, here are the factors that make up your FICO credit scores, and how installment accounts fit into the picture.
FICO credit score factors
Installment accounts should show up in your credit score factors as "amounts owed," although amounts owed also can include the balances on your revolving accounts. Generally speaking, amounts owed will score better if your revolving balances are below 30 percent of the total revolving limits. As for installment loans, you'll likely score better as your loan balance gets smaller over time.
This isn't a factor you likely have to lose sleep over in relation to your installment accounts. According to myFICO, "owing money on credit accounts doesn't necessarily mean you're a high-risk borrower with a low credit score."
On the other hand, having an installment loan and a revolving account increases your credit mix, which can help your credit scores, a positive as long as you make your payments in full and on time every month. That's because it shows lenders you know how to handle a variety of credit accounts. Installment loans will also play into your payment history, which is a good thing if you always pay on time.
VantageScore credit score factors
As for your VantageScore credit scores, installment accounts should show up as "total balances/debt." Again, this factor can be improved upon as you pay down your installment account or accounts over time. Installment loans may also affect the factor "type and duration of credit," meaning it can help to have both an installment account and a revolving account in order to show multiple types of credit. Finally, your installment accounts should factor into your payment history, as each payment you make (or don't, as the case may sometimes be), should be recorded each month.
Factors to consider when handling installment accounts.
If you're worried that having a high-balance installment account, such as a mortgage or student loan, will hurt your credit, you might not need to be. As long as you make your payments in full and on time each month, you'll chip away at the balance owed and show a positive payment history.
This article originally appeared on UpturnCredit.com and was syndicated by MediaFeed.org.