Revolving and Installment Types
of Credit and their impacts on your credit score
Types of Credit
and their impacts on your credit score:
10% of 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:
Open-ended Credit (Revolving):
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.
Therefore, if you have only enough money to pay your mortgage
payment OR pay the minimum balances on your two credit cards, your
first choice should be paying the mortgage payment first and pay the
credit cards after.
Don’t carry a large number of credit or store charge cards. Interest
rates are high and scoring models looks unfavorably on them.
To find out more about your credit score
and how to get a free copy of your credit reports, or find out about
credit scores in general and tips on how to improve your credit
score, please see one of the appropriate articles from following:
What is a credit score,
What makes up a credit score, Tips on how to improve their credit
What impact they have on your Interest rates & why they are
List of Do’s and Don’ts they should do before applying a mortgage
List of Do’s and Don’ts after being approved for a mortgage loan.
If you are buying a house soon, don't open a new charge card