Credit Myth #5: All forms of debt are equal

After spending over 16 years in the mortgage lending industry I have identified seven myths that consumers commonly hold regarding their credit.  In this series of videos I am going to breakdown each myth and help you better understand how your credit scores are determined so that you can achieve a better outcome for your next loan application.

The fifth myth is that all forms of debt are looked at equally.  The credit scoring algorithms classify debt as either being an installment loan or revolving credit.  Watch this short video for more information on how to manage these forms of debt to enhance your credit.

Revolving Credit

An example of a revolving account is a credit card.  A lender approves a borrower to spend up to a credit limit.  It is then up to the borrower to determine how much they borrow relative to that limit and how much they pay back each month.

Generally speaking revolving credit is considered riskier than installment loans but when a borrower has a history of using their revolving credit conservatively this will improve their credit.

Installment Debt

An example of an installment loan is a fixed rate mortgage.  In this case the borrower receives a lump sum from the lender and agrees to repay the loan over a period of time with interest.  It is most important that a borrower make the payments in a timely fashion.  In general, an installment loan is considered less risky than revolving credit.

Ideally, a consumer will carry a mix of installment and revolving accounts and make their payments in a timely fashion.

Please contact me today to learn more!