Are you worried about having too many installment loans? Well, you shouldn’t. The number of loans isn’t the problem: it’s the fixed monthly payments that can become the issue. If your debt to income ratio is too high, it doesn’t matter if it’s an installment or revolving account.
What is the Appropriate Number of Installment Loans to Have?
There is not a certain number of installment loans to have. In general, too many installment loans is when you’ve overloaded yourself in debt. If you are either paying the minimum payment or not even that for all your debts, that’s when enough is enough.
If you’ve been to school and took out loans, it’s easy to have four or five installment loans due to your student loans. Each disbursement is a separate loan itself. Then, auto and home loans come into place, and in a few years you’ll find yourself with at least six loans. Creditors are well aware of this. In fact, there is a formula or factors that determine your overall credit score.
- 35% – Payment history
- 30% – Amounts owed
- 15% – Length of credit history
- 10% – New credit inquiries
- 10% – Types of credit used
So from these figures, just having too many installment loans is not the question, it’s your overall history of having the loans. A good mix of revolving and installment accounts on your credit report can prove you are a responsible consumer.
Will Paying off an Installment Loan Hurt My Score?
You may have heard that if you start paying off too many debts, it could lower your credit score. This is not entirely true. Eliminating something such as a credit card and closing the account has a negative impact because it minimizes the length of your credit history.
If you are considering paying off an installment loan or two, it, in fact, can help your credit score. It will stay on your report for at least 10 years, increasing the length of a positive credit history. It also shows that you have paid the debt off on time and in full, something every creditor wants to see.
Which Installment Loan Should I Consider Getting Rid of First?
If you do want to pay off your installment loan, pay off the one with the highest interest rate first. This will save you money down the line of which you can apply towards other debts. If your interest rates are the same, pay off the more recent loan first so you can continue to establish your lengthier loan period.