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How Do Installment Loans Affect Credit Score?

For many individuals, a credit score is the most important number in their financial life. Credit scores serve as representatives of an individual's financial responsibility, and demonstrate to creditors that an individual is financially stable and able to take on a loan or a line of credit. As such, many financial activities are demonstrated on a credit history report, which is the basis for a credit score. Installment loans are highly influential on an individual credit score, as they demonstrate the financial ability of an individual to maintain a long-term line of credit without resorting to late payment or default.

Financial Responsibility

The maintenance of a long-term installment loan on an individual's credit history can do much to boost their overall score. Long-term lines of credit are signs of financial responsibility, as it demonstrates an individual's ability to satisfy credit lenders and other financial institutions. This of course depends on the type of loan, as a long-standing on a small loan may display an individual’s inability to pay off a small amount of debt. In such a case, installment loans hurt, rather than boost an individual credit score. If you are looking for the financial boost, make sure that the type of loan is long-term and that each payment is made no later than the actual due date. The longer you have the loan and it remains in good standing, the more it can boost your credit scores.

Stability

One of the most important measures that an installment loan shows on a credit score report is the ability of the individual to make timely payments on a loan. Over the long term, this is highly beneficial, as this demonstrates to the individual lenders that the borrower is able to make steady payments for long periods of time without default or late payment. Banks and lenders are much more likely to extend credit to such individuals, as they have demonstrated their ability to adequately maintain their finances in a way as to not affect their good standing with other lenders. The older each line of credit is, the more impact it can have on your credit report.

Late Payments

For late payments in long-term installment loans, there is typically a grace period that allows individuals to pay off their credit obligations without incurring a report to a credit bureau. The demonstration of late payment can have serious effects on a credit score, as it jeopardizes the individual's ability to demonstrate financial responsibility. Although a single instance of late payment will not seriously affect their credit score, such continued practices will make lenders reluctant to lend; especially if such practices are met on other credit accounts within the same time period. To lenders, this demonstrates an individual's inability to make adequate payments as well as maintain their financial situation in such a way as to adequately maintain their credit obligations.

Conclusion

Overall, installment loans allow individuals to buy large-scale items that would normally be unaffordable without that additional line of credit. Due to this large-scale purchase, an installment loan will have a huge influence on an individual's credit score; borrowers must be careful of the effect of an installment loan on their credit history, as a number of financial mistakes in this area can significantly alter their credit score. Alternately, a number of on-time payments can significantly raise one’s credit score and start to show lenders that financially, the person whose score they are looking at is turning around past mistakes and starting to take full responsibility for their financial actions. Just make sure you only take out an installment loan if you are going to be able to pay it off, even in the event of an emergency, to help protect your credit.