Installment accounts

by Karl
Updated: July 23, 2018

Having installment accounts on your credit report is necessary to maximize your score

In order to maximize your credit score your credit report has to show evidence that you can manage more than one type of credit account. Revolving accounts like credit cards are the most important but it helps to have some installment accounts too.

Installment accounts are loans that are repaid on a predetermined schedule. They generally have no flexibility and are automatically closed as soon as they are paid in full.

Effect of opening

When you apply and are accepted for an installment loan, the following happens:

  • A hard pull on your credit report (-)
  • A new account is added (+)
  • Average age of accounts is reduced (-)
  • Total credit line is increased (+)
  • Total debt is increased (-)
  • New credit is used at 100% (-)
  • Utilization is increased (-)

where (+) means a positive effect and (-) means a negative effect.

The net effect is to lower your score.

Reporting variations

You’d expect all installment accounts to be reported the same but they aren’t and it’s impossible to get a reliable answer in advance. Here are some of the possibilities:

  • Account doesn’t appear on credit report at all
  • Account is reported as a revolving account
  • Credit limit is not included in available credit
  • Credit limit remains at its original value (good)
  • Credit limit is reduced to match balance (always 100%)

Strategy

It’s important to have at least one installment account on your credit report at any given time and since closed accounts are included for up to 10 years, it should be fairly easy to achieve. Common sources are:

  • Auto financing, mortgage or other secured loan
  • Student or other unsecured loan
  • Retail financing (can be 0%)
  • Personal loan provided it’s not from a finance company

    Be very careful with personal loans - they are frequently associated with borrowers who have bad credit and can be expensive.

Note that paying off a loan early can actually work against you even if it seems to improve your credit score. Lenders make loans with the expectation of making a certain profit. If you pay off your loan early, future lenders will have less incentive to work with you.

More info

“Will an Installment Loan Help Your Credit?” at nerdwallet.com.

“Dos and Don’ts of Using a Personal Loan to Build Credit” at smartasset.com.

“How Does Paying Off a Loan Affect Your Credit Score?” at blog.credit.com and creditkarma.com.

Internal links

Credit monitoring Credit card strategy Average age of credit history Go to Articles
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