Do Installment Loans Affect Your Credit Score?
Some types of loans aren’t going to make a big, positive impact on your credit score—even if you pay them off in-full and on-time. Other types of loans will. And all types of loans will certainly damage your credit score if you do not pay them off. An installment loan is a type of loan that falls into the double category of hurting you if you don’t pay it but helping you out if you do.
Using Installment Loans to Improve Your Credit Score
Installment loans require equal payments at certain times over a set period of months or years until the loan is paid back. Installment loans can improve your credit score if you:
- Use Only Credit Cards Currently: A good credit score won’t be based solely on your use of credit cards. For good credit, you’ll need to diversify. Simply taking out an installment loan will be a step in the direction of a better credit score.
- Pay on Time: An installment loan will help your credit score improve as you pay it off on time with full payments. This will take time and effort, but a good credit score isn’t built in a day. As time goes on and you continue to show consistent, reliable habits of paying off your loan, your score will improve.
- Use Less Credit: The amount of credit you use (credit utilization ratio) is another key factor in determining your credit score. Taking out an installment loan to pay off your credit card debts will reduce your utilization ratio and should almost automatically improve your score.
What Kind of Credit Score Improvement Can Be Expected with the Use of an Installment Loan?
The above-listed ways to use an installment loan to improve your credit score take time, effort, and patience. And that’s the reality of building up credit: patience and good habits. Over time, you will see a steady increase in your credit score—eventually to the point where you have nearly excellent credit. The reality of a good credit score boils down to you being able to make your payments in full and on time and to diversify.
However, there is one other way to use an installment loan to build up good credit much faster than the slow and steady ways. An installment loan can be taken out as a credit builder loan. What does this mean? It means that if you are strategic about it, taking out an installment loan—whether you need it or not—can really improve your credit score.
Credit Builder Loan
As indicated by its name, a credit builder loan is designed specifically to help you build good credit. If you have very little credit, this type of installment loan can help you out.
These loans work a little differently from other installment loans. After you get approval for a credit builder loan, the money agreed upon is put in a savings account. Your lender will then report the amount you “borrowed” to agencies. You receive the full sum of money after you have paid it all back to the lender. Whereas traditional loans get you the money and then you pay it back, you pay the money before receiving it with this loan.
Paying this installment loan off on time builds your credit, and you end up with the money at the end of your payments. Just as with other loans, if you fail to make your payments on time, your credit score will suffer.
Types of Installment Loans
There are several different kinds of installment loans available for your use. Some fall into the mortgage categories, others do not.
Types of Mortgage Installment Loans
The two most common types of mortgage installment loans are:
- Home: A home mortgage is a type of installment loan with steady, fixed payments that take place over 15-20 years on average. You can pay off a home in even less time or take even longer.
- Auto: You can take out an installment loan for a vehicle. You’ll have to pay regular, most-likely monthly payments toward the total cost of the car.
Non-Mortgage Installment Loans
Installment loans can also be used in other capacities, including:
- Student Expenses: You can take out installment loans to pay for college or university expenses.
- Personal Loans: A personal loan can be used for just about anything—from travel expenses to side business start-up expenses.
Do Installment Loans Report to the Credit Bureaus?
Any loan that gets defaulted on will be reported to one of the credit bureaus. Your installment loan will likely be reported to them anyway because they are often reported to credit agencies. This isn’t a bad thing, as long as you keep up with paying it off on time.
How Long Do Installment Loans Stay on a Credit Report?
If you have an installment loan on record on your report and you have made late payments on it, it will stay on your credit report for up to 7 years. So do your best to pay the loan payments on time and in full.
It’s clear that installment loans affect your credit score, but their impact can be positive or negative, depending on whether you pay back the loan as agreed or not. If you can manage the payments, an installment loan can be a powerful financial tool that helps you obtain something you need like an education or a car, and it can even be used to build your credit. Walking in with your eyes open is key. We hope this information about installment loans has helped equip you with the knowledge you need to make the right decisions for your financial future.
