Installment Credit vs. Revolving Credit

While I was a mortgage lender, I worked very closely with buyers looking to increase their credit score to receive a lower interest rate on their home loan.

In many cases, paying down personal loans would do the trick. The real question was, which debts should be paid down and why.

This is where it’s important to understand the difference between installment credit and revolving credit.

It’s simple really, installment credit is one that has a start and a finish time-frame. For example, an auto loan will have something like a 5-yr loan tied to it. Once paid off, the vehicle is yours.

Revolving credit accounts are credit cards or Equity Lines of Credit. With revolving credit accounts, if you pay the minimum payment the balance you owe will usually remain the same.

If one is looking to decrease their debt-to-income ratio then paying down installment credit accounts is the answer. If one is looking to increase their credit score, paying down their revolving accounts below 30% of their credit limit will do the trick.

As a rule, I always advised my clients to work on paying down the revolving credit accounts first, then work on the installment credit accounts.

Everyone’s situation is different and the real advise is to work closely with your mortgage lender. Understand the differences and make your overall credit worthiness one to brag to your friends about.

In this economy having a 700 credit score barely gets you through the door. Shoot for 800, why not.

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