Revolving Debt and Credit Scores

Your credit score is a huge determining factor that is considered during the mortgage application process. In this week’s blog, we’ll dive into credit scores and the factors that impact them, with a special focus on revolving debts. Revolving debt is a type of financing in which borrowers are given a credit limit and the freedom to borrow up to that limit without the need to constantly reapply for credit. Likewise, they have the freedom make payments on their own schedules. Credit cards are a prime example of this type of lending, which must be carefully monitored because of its high impact on credit scores. Read on to learn more about revolving debt and credit, and contact the Family First Mortgage team in Lafayette, LA, if you’re interested in learning more.

What are Revolving Debts?

Revolving debts are a part of most people’s financial profiles. In addition to credit cards, personal lines of credit and home equity lines of credit are common types of revolving debt. Revolving debt is a great tool that can help you build credit, but if managed poorly, it can also have a hugely detrimental effect on your credit.

Revolving Debt and Factors That Affect Credit

There are five main factors that affect your credit score: payment history, credit usage, length of credit history, credit mix and types, and credit inquiries. Each of these is affected by revolving debt. It’s important to keep the credit use ratio – that is, how much you owe as a percent of how much you can borrow – as low as possible.  Lenders will periodically increase borrowers’ credit limits, which typically improves the borrower’s credit score, if his or her debt does not increase in kind.

It’s important to note that when you maintain a balance on your credit cards, you’ll eventually be subject to interest charges. Some credit cards have interest rates exceeding 20%, which can quickly add up and become a burden.

Installment Debt and Credit Scores

Non-revolving debt is known as installment debt. Like revolving debt, installment impacts all five factors that determine your credit score. Examples of installment debt include car and mortgage loans. These loans have a predetermined payment schedule, which makes them more predictable and, in some cases, more manageable for some than revolving debt. Once you pay off an installment debt account, it automatically closes. To get a new installment loan, you’ll have to go through the same approval process again. Like revolving debt, installment debt can help you build credit over time with regular, on-time payments, and it can be detrimental to your fiscal health if you miss or make late payments.

Learn More Today

To learn more about revolving debt, installment debt, and other factors that impact your credit score, contact Family First Mortgage. Our skilled mortgage professionals can help set you in the right direction to improve your credit score and improve your chances of getting approved for a mortgage. We’re located in Lafayette, LA, and we would love the chance to help you achieve your goal to own a home.