When rebuilding your rating, having a mix of credit products in your name is essential. In Canada, there are two main types of credit categories: installment accounts and revolving accounts.
When applying for loans, lenders prefer when borrowers have installment and revolving credit because it shows that they can manage different types of debt obligations. However, only one kind of account impacts scoring, which is vital to understand when repairing credit.
Before discussing which type of account builds credit history, let’s breakdown the differences between revolving vs. installment credit:
Installment credit accounts include mortgages, auto loans, student loans, and personal loans. These accounts have a set length and end date, known as a term. An amortization schedule also outlines how the principal amount reduces with predetermined bi-weekly or monthly installment payments. The amount you owe in interest will vary based on the type of loan and payback schedule. When the loan balance is zero, the account will close.
Revolving credit accounts include credit cards, personal lines of credit, and home equity lines of credit. These accounts have a set credit limit, which is the maximum borrowing amount. By paying down the loan, the available amount of credit increases and is open for utilization. Balances can be paid in full at the end of each billing cycle or carried over from one month to the next. When carrying a balance, interest charges will apply (unless it’s a 0% loan).
Revolving Vs. Installment Accounts in BC: Which Impacts Your Credit Score?
Having a revolving and an installment account – like a credit card and an auto loan – will impact your credit rating. But any revolving debt (especially credit cards) will play a significant role in your score’s calculation.
There are two reasons why:
1. Revolving credit is more influential than installment credit since this form of debt is used to calculate the percentage of total credit that you are using. Your credit utilization makes up 30% of your credit score and is the second-largest factor after payment history. As you pay down loan balances, your rating will increase, and your utilization will lower as more credit is made available.
2. Installment accounts are not included in credit utilization calculations and do not impact scoring as much. When calculating ratings, credit bureaus examine revolving accounts, like credit cards, because they are a more reliable indicator of a borrower’s risk. Installment accounts have boundaries in place, including the payment amount, due date, frequency, and loan term. Revolving credit, on the other hand, provides more freedom. Borrowers can make or skip payments as they see fit, which lenders assess when qualifying loan applicants.
Why Do Revolving and Installment Accounts Matter in BC?
Repair Poor Credit in BC With TransCanada Finance
At TransCanada Finance, we are passionate about connecting consumers to the information they need to rebuild their ratings and overcome past credit mistakes. Whether you have bad credit, no credit, or have undergone bankruptcy, we’ll work with you to improve your score and obtain the financing solutions you need.
