Menu

How Do Installment Loans Affect Credit Score?

An installment loan is a type of financing where borrowers pay back the lender the principal plus interest. Some of the most common examples include mortgage, student loans, and car loans. Regardless of what type of installment loan you take out, it will end up influencing your credit score if it is reported to a credit bureau.

How Do Installment Loans Affect Credit Score?

If your lender report to credit bureaus, it will end up influencing your credit score. You can check this by either reading your loan contract, check lenders site, calling or emailing them or just by Google it.

Exactly how do Installment Loans Affect Credit Score?

Installment loans are an essential part of building a credit score because they demonstrate to lenders how reliable you are. If you can repay your loan on time, more institutions will give to you in the future. However, if you have late or missing payments, these will be red flags to lenders that you might not be the best candidate for a future loan.

The goal of creditors and lenders is to minimize their risk. Credit scores provide the institution with a predictive measure of how stable someone’s finances are. It also represents their credit history, which can suggest how likely they are to fulfill the terms of the loan.

Generally speaking, making substantial and on-time payments on your credit line will have the most significant boost to your credit score. A mortgage is an excellent example as borrowers typically need hundreds of thousands of dollars for the home and must make monthly payments on that amount. If an individual can do that, it will bolster their credit score.

Ways to Reduce Credit Score

However, there are plenty of ways to uncut your credit score. Perhaps the easiest one is to miss payments. While missing one payment won’t severely impact your credit score, several misses can be a drain. That is because payment history typically represents 35 percent off the credit score.

Other actions that can reduce your chances for a loan, and your credit score include:

  • A credit utilization ratio over 20
  • Closing unused credit cards
  • Unpaid or high debts compared to income
  • Lack of diversity among credit scores
  • Short credit history
  • Too many requests for credit
  • Errors on credit score

Writer

Vivaan Marsh is a professional writer, editor and an expert in personal finance. Her career as a professional writer stretch for over 11 years. One of her passions in life is to help everyday families with there financial problems, making their life a bit easier and explaining complicated topics in an easy way. Read more >

Write a comment

All fields are required

Comment

Main menu