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