At some point in our lives, we have used credit. Whether it was to buy a car, to pay for an education, or as more of a convenience while shopping at the store. When applying for a mortgage loan, your lender looks at your credit score, credit utilization, and payment history to determine whether to approve your loan or not. Credit comes in two “flavors”: revolving credit and installment credit. And each affects your chances of mortgage approval in different ways.
Revolving Credit vs Installment Credit
Revolving Credit
Accounts with revolving credit offer a set limit (such as a credit card). Each month, the balance and minimum payment may vary. Lenders look at the current reported balance and limit as well as the history of recent balances and payments. Lenders set a maximum debt ratio for borrowers. Typically, this is 43%. That means that your maximum debt load cannot exceed 43% of your total income. Credit reporting agencies like to see balances at no more than 30% of the limit on an account. The fastest way to boost your credit score is to get your revolving credit accounts at 30% or less than their limits as soon as possible.
Installment Credit
Car loans. Student loans. Personal loans. Mortgage loans. All of these are examples of installment credit. A loan company approves the borrower for a set amount. Then, they divide up the payments over a specified period of time. These payments never vary and, at the end of the term, the loan gets paid off. Lenders may not even consider this as part of your debt load if you only have 10 payments or fewer left. As long as you make your payments on time consistently, installment accounts should not hurt your chances of loan approval. Of course, your credit score and income also factor into your chances of mortgage approval. But if you need to pay down debt, many financial experts suggest tackling your revolving credit accounts first to boost your credit score as well as save the most money in interest.
