Debt is never a fun subject to talk about, but it’s crucial to understand it to become financially stable. When it comes to improving your credit score, your payment history plays a vital role in how high or low it is. If you want to ease the heavy burden of debt and break away from the financial stress, the first step is in learning about the two major categories of debt.
What Is Revolving Debt?
Revolving debt refers to all debt that isn’t a set loan amount for a determined period. The amount you owe and minimum payment required changes as you pay off and take on more debt with revolving debt.
For example, your credit card balance is carried over month after month until you reach the established credit limit. You won’t be charged with interest if you pay the balance in full every month, but you will be charged interest if you pay less than the total balance.
Since credit cards aren’t backed by an asset, lenders place higher interest rates on credit card owners. The longer you wait to pay off the balance of your revolving debt, the more you’ll earn interest, and the heavier your financial burden will be.
The Impact on Your Credit Score
Although both revolving and installment debt will impact your credit score, the former can have a significant effect than the former. Since scoring agencies believe that credit card debt is a more reliable indicator of your risk as a borrower, you’ll have to mind how much credit card debt you have if you want to improve your credit score.
Credit utilization is an essential factor when determining your credit score, which measures the balances you owe on your credit cards relative to their credit limits. As one of the main factors credit scoring agencies consider, you may want to better manage your credit card debt.
What Is Installment Debt?
An installment debt is the lump sum you borrow from a lending company. Unlike with a credit card, you must first pay off your balance before you’re allowed to borrow more money. While resolving debts don’t have a predetermined length and end date, installment debts do.
Installment loans such as mortgages, auto loans, personal loans, and student loans all have loan agreements, including an amortization schedule used to reduce the current loan balance. Since you’ll know the exact amount of your monthly payment and how long you will make payments, you don’t have to worry about higher interest rates and unmanageable debt.
Using Installment Debt to Pay Off Revolving Debt
When it comes to improving your credit score, we recommend paying off your revolving debt first. Due to the heavy impact of revolving debt on your credit score, you’ll be able to improve your credit once you prioritize their payoff.
Paying off your credit card balance can be difficult if you don’t have enough funds, but installment debt may help you with your predicament! Taking out a cash loan to consolidate your debt will help improve your credit score while making it easier to manage your debt by making a single payment each month.
Although it can be nearly impossible to break free from the chains of debt entirely, you can still have a life free from financial stress. As long as you manage your finances responsibly and apply for a cash loan from a trusted lender, you’ll be able to have a financially secure future!
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