Installment loans are a vital part of your credit profile and even if you do not want a common installment loan now, such as a mortgage or student loan, you could want one in the future. A lack of a previous installment loan hurts your chances at approval for a new one. However, you can probably attain a high credit score without an installment loan. The credit scoring model is less concerned with installment debt than revolving accounts.
Identification
Without an installment loan on your record you cannot have a good variety of credit, which counts for 10 percent in the FICO formula. Good borrowers tend to have several credit card and installment accounts. This is not to say that you must have an installment loan to obtain good credit. You can make up for a lack of variety by always paying on time or managing credit well for a long time.
Effect
Losing a few points in the FICO formula because of a lack of an installment loan could make loans much more expensive. Most lenders set interest rates based on what tier your score falls into. The most common top tier as of 2011 is 760 to 850. Thus, if you had a 750, you could pay a few tenths of a percentage more on your interest rate. This may not seem like much but it becomes significant when you take out a a big, long-term loan such as a mortgage or auto loan.
Don't Take Loan Just to Boost Credit
Applying for an installment loan just to boost credit may not be the wisest choice. Any debt is bad for your financial health. Also, it may take a while to see any benefit. Creditors usually perform a hard inquiry into your credit for any loan, which costs three to five points. A new account lowers the average age of all of your accounts and increases your monthly debt service to monthly income (DTI). While the credit reporting agencies do factor in DTI, lenders like to see a DTI as low as possible.
Tip
It is impossible to say what your credit score will look like without an installment loan. You could have a great score and only hold credit cards. If you are trying to rebuild credit as fast as possible, recent installment loans are necessary to squeeze the most points out of your credit history. The FICO model ignores installment loans once you pay them off.
0 comments:
Post a Comment