Revolving and Installment Types of Credit and their impacts on your credit score

      There are two basic types of credits: Open-ended (Revolving) and Closed-ended (Installment). Each type has different effect on the credit score. They make up 10% of your credit score:

Open-ended Credit (Revolving):   

Revolving Credit Refers to a credit, up to a specified limit, made on a revolving basis for the purchase of products. Bills are issued monthly to the borrower for a total balance charges which are usually a portion of the credit. The borrower has a choice to pay an amount from Minimum Payment Required to the full Balance within a couple of weeks. Credit Cards (MasterCard, Visa, American Express, Discover Card, etc.), Store Charge Cards (Macy’s, JCPenney, Sears, Gas Cards, etc…), are examples of Open-ended or Revolving Credits. These cards usually carry a high interest rate.  

Closed-ended Credit (Installment):      

Installment Credit Refers to a credit for a specific amount, made for the purchase of a specific product, usually large items, such as home, car, boat, major appliances, etc. The payment period, number of payments and payment amount for each period are fixed. The borrower cannot pay less than specified payment amount for each period. These loans usually carry a low interest rate and are for a longer period of times.

TIPS:

·         Closed-ended Credit (Installment) payment history, especially Real Estate accounts have much more impact or weight on your credit score than Open-ended Credit (Revolving) payment history.

·         Repossession, Foreclosures and Short Sales in Real Estate Accounts have major negative impact on your credit score, much worse than unpaid cared card balances. Try to avoid them and work it out with lenders as much as possible.

Therefore, if you have only enough money to pay your mortgage payment OR pay the minimum balances on your two credit cards, your first choice should be paying the mortgage payment first and pay the credit cards after.

·         Don’t carry a large number of credit or store charge cards. Interest rates are high and scoring models looks unfavorably on them.

To find out more about your credit score and how to get a free copy of your credit reports, or find out about credit scores in general and tips on how to improve your credit score, please see one of the appropriate articles from following:

What is a credit score,

What makes up a credit score, Tips on how to improve their credit score,

What impact they have on your Interest rates & why they are important,

List of Do’s and Don’ts they should do before applying a mortgage loan, 

List of Do’s and Don’ts after being approved for a mortgage loan.

If you are buying a house soon, don't open a new charge card

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