Comparing Installment and Revolving Credit

There are several factors that can impact your score. Each component of your score is weighted differently, which means some components are more impactful than others. Focusing on the more heavily weighted will have a greater impact on your overall score.

Different Scoring Factors

Here’s a quick breakdown of credit scoring factors for VantageScore 3.0:

• 40% Payment History
• 23% Credit Usage/Utilization
• 21% Credit Age
• 11% Account Mix
• 5% Inquiries

Moving the needle in credit mix is small compared to payment history or utilization. That’s why credit cards (revolving debt) impact utilization, and overall credit score more than installment debt. If you’re looking to improve credit mix, which is a mix of installment and revolving credit, you may need to add installment accounts or credit cards depending upon your situation. Here’s a little more info on that:

What is Installment Credit?

Installment credit is a loan with fixed payments over a specific period of time. Some examples are mortgages, student loans, and auto loans. Let’s take a look at how installment credit can improve your credit and whether you should add one of these loans.

How Installment Credit Can Help

When you apply for an installment credit account, you borrow a fixed amount of money and make specific payments until the loan is paid off. This kind of loan can help you in a few ways:

• Timely Payments. One of the benefits of installment credit is that it requires you to make timely payments over a long period of time. Making those payments on time, every time, is good for your credit history.

• Mixing it Up. When you add installment credit to your credit profile, you bolster your mix. Lenders like to see that you can manage different types of credit.

Should You Add Installment Credit?

It’s typically not a good idea to search for loans just to boost your credit score. More debt is not something you should be looking for. However, if this is something that comes organically — like applying for a mortgage — then go for it. Just remember to ensure you can afford the payments before signing on the dotted line.

Credit Utilization Mainly Applies to Revolving Credit

Credit utilization is calculated using revolving credit lines, credit cards, retail card, and lines of credit. It looks at how much credit you’re using compared to your credit limit.

For example, here’s a breakdown on utilization for two different cards:

• $1,000 balance on a $2,000 limit = 50% utilization (high)
• $200 balance on a $2,000 limit = 10% utilization (excellent)

This ratio makes up a substatial piece of the credit score pie, about 23% of your VantageScore 3.0, making it one of the most powerful scoring factors. Meaning any changes to utilization will have a greater score impact than other score factors.

Installment Loans Impact Score Differently

Paying down a mortgage from $250,000 to $240,000 won’t move your score much. But paying down a credit card from 80% credit utilization to 20% can significantly increase your score — sometimes quickly.

Why Revolving Credit Carries More Weight

In the credit scoring models, like VantageScore and FICO, credit cards carry more weight because they provide a better, real-time indicator of financial behavior and risk compared to installment loans. Here are some of the reasons why:

• Credit Usage. Revolving credit cards are the main driver of credit utilization. High revolving debt is a high risk indicator.
• Unsecured Debt. Unlike homes and cars that are used as collateral, credit cards are unsecured lines of credit, which is a higher risk for lenders.
• Behvavioral Characteristics. Revolving accounts are seen as more predictive of risk because it shows variable behavior and financial clues, like paying only the minimum amount due vs. paying off the balance every month. Whereas installment loans are seen as more structured, predictable debt.

Bottom Line

When it comes to revolving credit and installment loans, managing them both is important for your credit mix. Lenders want to see that you’re able to manage different types of debt effectively. Credit cards will more heavily impact utilization, where a home loan has a smaller effect on utilization. Managing credit cards, by paying down balances is one of the quickest ways to improve your score.