Does Paying Off Installment Accounts Help Your Credit?

Your credit report shows all of your present and past debts and indicates how they were paid. It also provides potential lenders a credit score that is determined from all of your credit history. The formula used is proprietary. However, if you pay all of your obligations when they are due, pay more than the minimum on credit cards and do not have any major derogatory items such as a bankruptcy or charge-off, your credit score should be excellent.

Installment Accounts

An installment account is one that has a fixed payment each month for a fixed number of months. They include vehicle payments, student loans and appliance purchases. Credit reporting agencies expect you to pay each payment when it is due. Before your first few payments, your score will temporarily drop because you do not have any payment history for the account. You should pay the payments when due. Accelerating a payoff on installment accounts will not increase your credit score.

Revolving Accounts

Credit agencies look at revolving accounts in a different way. The agencies want you to pay more than the minimum payment each month. Agencies also want you to keep your balances below 30 percent of your available credit at all times. If you owe 100 percent of your maximum credit limit, it will have a major effect on your credit score. The closer you get to 30 percent or less, the better your score will be.

Miscellaneous Items

Negative items such as a bankruptcy, foreclosure, judgment and collection accounts naturally have a negative effect on your credit score. The older the effective date is, the less effect it has on your score. A paid negative item is better than an unpaid one, but having no negative items will result in a considerably better score. A 30- or 60-day late payment would have a major impact on your score if the date was within the past year, but it would have little impact if the reported date was five years ago.

Considerations

Pay your installment debts when they are due. Pay a minimum of twice the minimum payment on credit cards and try to maintain balances at or below 30 percent of your credit limit. Do not let a debt become a collection account. If you disagree with a $20 charge and refuse to pay it, it will cost you considerably more than that in increased interest rates because of a collection account showing up on your credit report. It may lower your score enough to prevent you from getting the credit you need.