Revolving Debt vs. Installment Loans: Why the Type of Account Matters to Your Credit Score

When it comes to how your credit scores are calculated, there are many factors at play. Credit scoring models consider how well (or how poorly) you pay your bills. They also consider what kind of debt you have, and how much of it you’ve got.

The list goes on and on, but if you want to earn and maintain great credit scores, you’ll need to perform well across all of the various credit scoring metrics. That means understanding which factors matter, and matter the most, to your credit scores.

One such factor that often leaves consumers scratching their heads is the fact that credit scoring models like FICO and VantageScore will focus on the various types of accounts on your credit reports rather than just how well you pay them.

More specifically, the different types of debt you choose to carry will influence your scores differently. One type of debt may have very little impact on your credit score, while others can send your score spiraling in the wrong direction — even if you make every single payment in a timely fashion.

The Different Types of Debt

There are many kinds of accounts that can appear on your credit reports. These accounts may range from credit cards to student loans to mortgages, just to name a few. However, the majority of the of accounts on your credit reports can be classified into one of two categories: revolving accounts or installment accounts.

Installment Accounts

When you take out an installment loan, the terms of your loan will typically require a fixed monthly payment over a predetermined period of time. For example, your auto loan might require you to make monthly payments of $300 over a period of five years.

Some common types of installment accounts may include student loans, personal loans, credit builder loans, auto loans, and mortgages. And, most of the time these types of loans will be secured by some asset, such as a car or a home. The notable exception, of course, is a student loan.

Revolving Accounts

The most common type of revolving accounts are credit cards. Unlike installment loans where you borrow one time (upfront) and will likely make a fixed monthly payment throughout the life of the loan, revolving credit card accounts work quite differently. With a credit card account, you generally have a set credit limit and you can borrow up to that maximum limit on a monthly basis.

The borrower can either pay the account balance in full each month, pay it off partially, or make a minimum payment as required by the lender. And, you can continue to draw down against your credit limit as long as you make payments on time. This type of debt is almost never secured by an asset, unless it’s a revolving home equity line of credit.

How Credit Scoring Models View Your Debts Differently

Your payment history: FICO and VantageScore, the two most popular credit scoring models, both treat the installment debt and the revolving debt on your credit reports very differently. However, when it comes to any account on your credit reports, the most important factor considered in the calculation of your credit scores is whether or not you pay as agreed.

If your payment history shows late payments on any account, whether it be a revolving account or an installment account, the impact on your credit scores is likely going to be negative. A late payment on an installment account and a late payment on a revolving account would likely be similarly damaging to your credit scores. Late is late.

Amounts owed: The balances on your accounts (i.e., the amount of debt owed) are another matter when it comes to credit scoring. In this credit scoring category, installment debt and revolving debt are not treated equally.

Credit scoring models will pay a lot of attention to your revolving utilization ratios — that is to say, the relationship between your credit card limits and credit card balances. When you carry a high percentage of credit card debt compared to your credit card limits, your credit scores are going to almost certainly begin to trend downward.

Conversely, you can carry a large amount of installment debt, such as a mortgage loan, and the impact of the balance of the installment loan on your credit scores is likely to be very minimal. For that reason it’s completely possible for a small $5,000 credit card balance (especially on an account with a low credit limit) to have a much more damaging impact on your credit scores than a $500,000 mortgage balance. I know, that’s hard to believe.

The Reason for Different Treatment

Many consumers wonder why credit card debt, even if it is paid on time, can have such a potentially negative impact on their credit scores when installment accounts are not treated in the same manner.

The answer is simple: Revolving debt is much more predictive or indicative of elevated credit risk. As such, it’s going to be much more harmful to you credit scores.

Installment debt, which is almost always secured, is a much less risky type of debt, primarily because people know if they stop making their payments they can lose their car or their home.

Related Articles

John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.

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Women: Wear Makeup, Make More Money?

Generally speaking, women earn less than men (74 cents on the dollar, to be exact, or 97 cents if we look at men and women in similar jobs). They also spend more on grooming products ($15,000 on makeup alone, according to Mint). The latter fact has been called the Pink Tax, and it’s another example of how women are stuck between a rock and a hard place when it comes to managing their professional lives. Why? Because it turns out that spending money on beauty products, far from a frivolous indulgence, might be a smart investment for women who want to make more money.

attractiveness premium

Image Credit: kaboompics.com/Pexels

Earlier this summer, a study in the journal Research in Social Stratification and Mobility found that while attractive people make more money in general—20 percent more, in fact—women’s “attractiveness premium” was entirely due to grooming (makeup, hair-styling, etc.), while only half of men’s attractiveness premium was because of their grooming habits.

The study authors write that the findings “findings underscore the social construction of attractiveness, and in doing so illuminate a key mechanism for attractiveness premia that varies by gender.”

Is This Good News or Bad News?

The obvious upside to this research is that (almost) anyone can learn how to apply makeup and do their hair. The downside is that “women’s grooming,” in the gender-stereotypical sense, is a lot more expensive and labor-intensive than men’s, the beard trend notwithstanding.

Writing about the study, Ana Swanson at The Washington Post says:

“In a highly unscientific poll, 27 of my female colleagues at The Washington Post reported putting an average of five products on their face that morning, and keeping two additional pairs of shoes at their desk. The two male colleagues I asked averaged half a product and one extra shoe each.”

Bottom line: it probably makes sense for women who want to get ahead to pay attention to grooming, but that doesn’t mean that it’s fair—or that pay equity will come at the end of a makeup brush.

“It gives me another way to think of the mechanisms that are creating gender inequality in our society,” study author Jaclyn Wong said in a statement, reported by AOL. “It’s something that constantly sits in the back of my mind as I do my other work: what’s different for women that might not matter for men? What are some of the pressures women face that men don’t?”

Tell Us What You Think

Have you ever changed your appearance, and seen a pay increase as a result? Tell us about it at Twitter, or leave a comment.

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Vote For Breaking the Internet at #SXSW17

Unless you’ve been living under a rock for the last few years, you may have heard of a little festival in the great state of Texas called SXSW. We were there last year when our team spoke at SXSWedu about economic mobility through education, and what employers really want from grads. And now, we’re trying to go again. But this time for a different reason.

Help the PayScale Team Speak At SXSW Interactive (Official SXSW Voting Page for PayScale)

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Image Credit: panelpicker.sxsw.com

This year, we’re trying to send two PayScalers from our lean and mean consumer marketing team to Austin to give a talk about content marketing. We’re the people who turn data into stories, and try to empower people in the workforce with advice and tips on negotiating their salary.

When we’re not building reports about the workforce or higher education, we try to break the internet with compelling and interesting content. That’s where SXSW comes in. Here are some details about the talk we’re trying to give, and why it matters.

How to Break the Internet With Zero Budget

In the age of high-roller brands competing for real estate on pay-for-play social media sites, how does one cut through the noise without a content marketing budget? Many professional marketers offer token advice like “create great content and the masses will come.” Well yes, but it takes money to promote great content and in today’s world brands with large budgets can outspend others on subpar content. In this session we’ll provide examples, case studies, and strategic insights on where and how to seed your content and create relationships with influencers to drive organic reach. Join us to unlock the secrets of marketing without spending a dime on Reddit and other online communities.

Questions We Will Answer

Through our talk, we will be providing answers to common marketing questions like, how do you amplify your content without spending any money? How do you identify the appropriate communities where you content will grow organically? And finally, how do you create relationships with influencers without spending a dime?

…Have You Seen Our AstroCat?

If you have reached the bottom of this post and still aren’t convinced to vote, perhaps you can be convinced by the sheer awesomeness that is the PayScale consumer marketing team logo. We call him Astrocat.

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Ready to Vote? Start here.

Are you going to #SXSW next year? We want to hear from you! Comment below or join the discussion on Twitter!

Featured Image by JD Hancock/Flickr

 

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3 Reasons Simone Biles Is the Only #MondayMotivation You Need

Simone Biles

Image Credit: Fernando Frazão/Agência Brasil via Wikimedia Commons

Yesterday, Simone Biles won her third Olympic gold medal, setting the U.S. record for the most gold medals won in a single Olympics by a female gymnast.

“It’s something I wanted so badly, so I just tried to keep a good mind going into vault,” Biles said after her win.

Keeping a good mind is everything in sports—and in your career. Even if you don’t follow the Olympics and can’t tell an Amanar from a Cheng, there’s a lot you can learn from America’s most elite gymnast.

  1. “I’m not the next Usain Bolt or Michael Phelps. I’m the first Simone Biles.”

 

works hard

This year’s Olympics coverage has been marred by a bizarre strain of sexism, with news outlets crediting Hungarian swimmer Katinka Hosszu’s record to her husband/coach, and finding space in a headline to mention bronze medalist Corey Cogdell’s husband (Bears lineman Mitch Unrein) but not her sport (trap shooting).

Then there’s the casual racism of headlines like Phelps Shares Historic Night With African American, referring to Simone Manuel’s becoming the first African-American woman to win a gold medal in swimming.

When a woman or an African-American succeeds, there are still plenty of people out there who will try to give credit for her achievements to someone else. That’s true in sports, and that’s true in business.

That’s why it was so important for Simone Biles to assert that she’s not the “next” anyone. She’s the very first her.

“I’m not the next Usain Bolt or Michael Phelps. I’m the first Simone Biles.”Click To Tweet

  1. She sees opportunities for improvement and takes them.

first simone biles

Last year, at the world championships, Biles took the bronze on the vault—impressive for any athlete, except Biles, who won the silver the previous year.

“She has medaled at the world championships on vault, but she hasn’t been able to win because her difficulty wasn’t high enough,” her coach, Aimee Boorman, told USA Today.

Biles renewed her commitment to working on the Cheng, a vault she’d been practicing for a year, but that wasn’t ready for competition. Yesterday, she used it to bring home the gold.

“There is a lot of satisfaction I have in winning gold on vault. Finally,” Biles said. “I’m just very excited because I was able to upgrade my second vault, and it’s exactly what I needed to do.”

  1. She competes against herself.

competes against herself

Yesterday, Biles won her second individual gold medal, finishing first in the vault. Still, she was unhappy with her landing on the first attempt.

“That first vault that she didn’t like, it earned Biles a 15.900, which was 0.367 higher than any other gymnast scored on a single vault,” writes Dan Wetzel at Yahoo! Sports. “She then followed it up with a meet-high 16.033 to take gold handily with an average of 15.966.”

Wetzel notes that Biles’ score was not only significantly higher than the silver medalist’s, but “the highest score ever in a vault final in an Olympics or world championships.”

Bottom line: you can’t succeed if you’re constantly looking behind you. In this age of carefully curated Facebook and Instagram feeds, it’s easy to get caught up in what other people are doing. Resist.

Don’t be the next anyone. Be the first you.

 Tell Us What You Think

Who inspires you to do your best? Talk to us on Twitter or leave a comment.

GIFs via GIPHY

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