Do you know the real meaning of an installment loan? Though loans do share a common definition, installment loan or installment debt specifically refers to the loan with a set or scheduled payment over a given period. A lot of offered loans today are considered as installment loans from mortgages to auto loans.
Can you consider credit card as an installment loan?
Though credit cards commonly require a monthly minimum payment, it is not regarded as an installment debt or loan. An instance where a loan can be considered as an installment loan can be seen in this situation: If you borrow $1000 for an emergency car repair that should be paid within 24 months with an additional 25% interest, it is considered as an installment loan.
In this case, you can get your full loan of $1000 then pay it back in small chunks of $53.37 regularly within 24 months. Take note that skipping a month of payment will only mean that your next monthly payment will double up so, be a responsible loaner and make it a habit of paying on time or in advance.
If you notice that your credit score isn’t turning out great anymore and you are dwelling with such little options, perhaps it’s about time to change your style. Remember that your credit score reflects on your credit report and how great you are in handling your loans. You may not be able to change what you’ve done in your past to end up with a bad credit score, but you can work on your future credit score to improve it.
Compared with a payday loan which should be paid in a lump sum on your next payday, installment credit can last for a longer term with small chunks to make it less painful. Moreover, installment loan or installment debt requires a much lower interest rate compared with credit cards. So if you are going to ask, “Will an installment loan help my credit?” These are the top 3 ways where you can use your installment loan to build credit:
When building your credit score, your credit report is being categorized into five categories to sort information. Two of the most influential groups that you should watch is your Payment History which eats up to 35% of your entire credit score and your Amounts Owed which eats up 30%.
10% of your credit score pie is taken up by your Credit Mix which pertains to the types of debt you owe such as installment loan, personal loan debt, credit card, auto debt, student debt, mortgage debt, and others. The more diverse your Credit Mix is, the better credit score you can earn.
Believe it or not, the best way to increase your credit score is to have less debt. This might sound like a joke but this is the truth so saving money helps a lot more than you can think of. Another thing that might surprise you is the fact that a great way to lessen your debt is to achieve lower interest rates. The lower interest rate you score on your loans, the less payment you will have to make in total. In other words, you’ll be able to get out of your debts faster.
Take note that since installment loans require smaller interest rates, applying for an installment debt with higher interest rates than your credit cards and other loans might not be worth it. The best way to save money is to consolidate your big debt into an affordable and worthy installment loan. But there is another way to help you keep money aside from scoring low-interest rate on your installment loan.
The trick is to aim for shorter loans which mean less cost. The longer you keep an outstanding loan, the longer you will pay the additional interest rate which is not a good idea.
Improving Payment History
As mentioned earlier, your Payment History covers 35% of your credit report. This only means that making it a habit to pay on time will automatically improve your credit score with installment loans. If you failed to improve this part of your credit score in the past, it’s about time you work it up to get reliable loans in the future.
The worst case for having a bad credit score is ending up with lenders who ignore making credit reports at all. This might favor some customers who don’t care about credit scores at all. But since you want your installment loan to build credit, creating an impressive Payment History is a must.
On the other hand, even if installment loans can save your credit scores, it can only give it a little boost. Because it tends to be more stable, its effect on your credit scores is quite modest.
According to Vantage Score, the best thing to handle your installment loan is to focus on how you are going to manage your payments instead of focusing on your actual balance. So instead of thinking about your current balance and counting it over and over, concentrate on making your monthly payments on time to build your credit score. Among the categories that make your credit score, the Payment History tends to be the most important.
With all this information, it is a fact that as you pay your installment debt regularly, your credit score should improve. And as your installment loan decrease over time, the more it will result in a better score. However, you must be aware as well of the fact that installment loans can take a year or more to be fully-paid especially if you are going to take a mortgage loan. Installment loans are amortizing your balance for a year or so to lessen your monthly payment.
But then again, you will eventually earn a high credit score over time if you are a responsible customer. Choose a reliable installment loan that is worth spending for an extended period to keep you motivated when it comes to payments.