Credit scoring formulas place substantial importance in your history of installment loans. This is a major factor among other inputs that make up the 10% of credit scoring formulas dedicated to credit mix.
| “Lack of Recent Installment Loan Information” | Credit Score Risk Factor Codes |
| Equifax | 32 |
| Experian | 32 |
| TransUnion | 4 |
| NextGen | F7 |
Other major factors that similarly affect your scores include lack of recent revolving account information and even more specifically, a lack of recent bank revolving information. Prospective lenders want to see that you can handle both revolving and installment loan accounts.
If you are applying for a credit card, then the card issuer will be more concerned with how you have managed your other bank credit card accounts. A personal loan application would be considered after a closer inspection of your installment loan history. Of course, neither applications would necessarily be subject to a manual review if your credit scores are well within their guidelines for acceptance.
Having managed an installment loan already will be the single greatest indicator of how you might handle a future installment loan. A car loan might be easier to obtain if you have previously repaid a personal loan or another car loan. A mortgage lender will look to see if you have repaid previous mortgage loans, car loans and personal loans.
All of these factors, whether specifically related to installment loan repayment or revolving account histories will affect your credit scores. If you have no installment loan history, you can expect a somewhat lower credit score than what you might otherwise be able to achieve.
If you are planning a major purchase that will require an installment loan, you will want to consider whether your previous installment loan repayment history will be enough to satisfy the lender’s concerns about your risk of failing to repay the loan. Previously repaid installment loans will provide this proof of creditworthiness. If you have never had an installment loan and expect to apply for a major loan, you may wish to demonstrate your ability to handle an installment loan prior to application.
One way to do this is to obtain a small personal loan with your bank or credit union. As long as your credit scores are in the upper 600s, you should have no problem obtaining the loan. For lower credit scores, you may need to guarantee the loan with collateral.
While a piece of property can satisfy the collateral requirement, an innovative solution is to deposit money equal or greater to your requested loan amount and purchase a certificate of deposit (CD). You may then pledge the CD as collateral for your loan, thereby giving your financial institution a liquid deposit to eliminate the risk of default. The rate of return on the CD can somewhat offset the interest rate charged on the personal loan. You should make on-time payments for a minimum of 6 months, at which time you may pay off the loan early as long as there are no prepayment penalties (rare for personal loans). By following this approach, you can jump start your installment loan history and boost your credit scores. Just understand that your credit scores won’t actually increase until you repay most of the loan, since owing a high proportion of the loan balance can be a separate negative influence on credit scores.
These positive accounts can remain a part of your credit history for 10 years following the final payment. As long as you open a new installment loan prior to the old ones dropping off, you can always have this important piece of the credit scoring formula satisfied.
Note: Lack of recent installment loan information is credit bureau risk score reason 32 on Equifax and Experian credit scoring products, and reason 4 with TransUnion. Code F7 applies for NextGen scores.
Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.
Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.
In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.
Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!
Favorite quote:
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."
Thomas Jefferson
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