Learn About Credit and Installment Loans With Blue Trust Loans

There’s no denying that a person’s credit score is a major part of their overall financial health. Understanding how certain things affect one’s credit score is the first and most important step to taking control of the family finances. In this article, readers can find out how installment loans can affect their credit score.

What Are Installment Loans?

Installment loans are an easy concept to understand. They are simply loans where the borrower pays the lender part of the loan amount at regular intervals, such as once or twice a month. Some common include auto loans, home mortgages, home equity loans, student loans and others.

Why Do Installment Loans Affect a Person’s Credit Score?

Lenders report installment loans to the major credit agencies such as TransUnion and Experian. These credit bureaus gather consumers’ credit information and they compile it into a report, which helps other lenders quickly understand a person’s credit history.

How Are the Effects of Credit Card Debt and Installment Loans Similar?

When a borrower pays off the balance of an installment loan, his or her credit score may not increase very much compared to if they paid off a credit card debt. There are some reasons why these types of debt are handled differently.

  • Installment loans’ risk prediction capabilities are different from those of credit cards.

  • Borrowers are more likely to repay installment loans as they are backed by collateral or equity.

  • Credit cards aren’t as stable, and borrowers don’t have to work to keep the collateral.

Installment loans have little effect on a borrower’s credit score because there is usually little chance that the loan will not be repaid. When the loan is paid off, the person’s credit score will not increase by much.

Timing of Payments

When a borrower pays off an installment loan, they should focus on submitting regular payments on time rather than paying the whole loan balance at once. The major way an installment loan could damage someone’s credit score is if they fail to make timely payments. Visit Blue Trust Loans for more information on installment loans and their effects on a borrower’s credit score.