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What does the lack of recent installment loan information mean on a credit report?
The lack of recent installment loan information means that you haven’t reported an active installment loan in the last two years. Installment loans are things like car loans and some types of personal loans. Suppose you do not have installment loans. It may factor into a lack of variousness in your credit profile. It probably costs you a few issues on your overall score, but nothing truly major. Paying on time and maintaining your usage low is far more critical.
It means you don’t currently have any personal, student, mortgage, or auto loans. It also typically means that you have not had such loans in the recent past.
That is not per se a bad thing. You don’t need such accounts to have good credit, and credit cards are enough to enjoy a pretty good score. Yet, it can help.
What is an Installment Loan?
A fixed-rate loan is a loan that a borrower takes out and must repay regularly. An installment debt payment includes the repayment of part of the principal amount borrowed and the payment of interest. The main factors that affect the amount of each regular loan payment are the loan amount, interest rate, and length of the loan term. The monthly average payment amount is usually the same throughout the loan term. That makes it simple for the borrower and their financial planner to plan to pay the required amounts.
How can installment loans affect credit scores?
If you pay on time, installment loans can be a great way to build credit. Credit scores are primarily affected by your payment history. A good record of timely payments can help you build credit. However, amounts that are more than 30 days late could seriously harm your credit score. Your credit score can be severely affected by losing your home or car due to foreclosure or repossession.
You only have credit cards right now, and your account mix is a smaller factor in your score. If you have only credit cards, you might be able to get a slight bump by adding installment debt.
Your credit utilization drops. Your credit score could be improved if you take out an installment loan to pay off your credit cards. Credit utilization is reduced by moving credit card debt onto an installment loan. Credit-speak for your credit limit and the amount of your current balance, and it plays a significant role in your credit score. You can reduce your overall and per-card debt by moving it onto an installment personal loan.
A lender credit check can temporarily lower your credit score if you apply for any credit product. These checks are known as “hard inquiries” and are recorded on your credit report.
Do you need an installment loan to improve your credit score?
Although it is not a good idea to borrow an installment loan to improve your credit score, there are exceptions: credit-builder loans. Building credit is their purpose for existence, as their name implies. These installment loans are outstanding for poor credit ratings or no credit.
After a credit-builder loan has been approved, the money will be deposited into a certificate or savings account. You will not be able to withdraw the money until you have paid off your loan.
By paying on time, you build your credit history and have an emergency fund when you are done repaying the loan. Failure to pay your loan on time can damage your credit score. Borrowing too much could also strain your budget, which could lead to missed payments.
Secured vs. Unsecured Installment Loans
Installment loans may be secured (collateralized) or unsecured (non-collateralized). A mortgage loan is collateralized by the house that is being bought. An auto loan’s collateral is the vehicle that is being purchased.
Installment loans, also known as personal loans, can be extended without collateral. Lenders can extend loans without collateral based on creditworthiness, which is usually shown through credit scores. And the ability of the borrower to repay the loan as determined by income and assets.
A non-secured loan’s interest rate is typically higher than a similar secured loan. That is due to the creditor accepting a higher risk of not-repayment.
What kinds of loans count for the “recent installment loan information” aspect of a credit score?
Any loan with a fixed payment on a fixed term can be counted for the recent installment loan information. A car loan is a traditional installment loan. Some signature loans (secured or not) are for a set amount with a fixed payment over a fixed term. Different from this is a mortgage loan. Installment loans are mostly loans that are not revolving loans, such as a credit card or a home equity line of credit.
The distinction is that you get a loan for a certain amount, you pay it off over time, and once you’ve paid it off, that’s the end of the loan.
Mortgages and car loans are the most prominent loans of this type. Still, unsecured loans (a.k.a. signature loans or personal loans) also apply.
Many credit unions offer an installment loan called a “share secured” loan. That is ideal for someone who may not qualify for credit and wants to build their credit.
Suppose you have funds in a “share account.” It is the credit union version of a savings account. That will enable you to obtain a “share secured” loan. It applies if you borrow your own money. Then you pay it back over time. Note that interest is charged on this loan. It will surely be more than the interest you earn on your share account. If you have late payments, that will hurt your credit score. However, assuming you make the required payments, it’s considered an affordable loan that will help to build your credit.
Hope you know the meaning of lack of recent installment loan information after reading the article.