If a credit score spits out the factor code of “Lack of Recent Installment Loan Information,” the algorithm gives you a clear direction to improve your rating.
The factor code says that your consumer report lacks the diversity needed to make a confident prediction about your future payment performance.
A diverse consumer report has recent information from all account combinations (secured, unsecured, revolving, installment).
Therefore, your next steps are clear cut.
Build your credit score by taking out a small starter installment loan from a lender that reports to all three bureaus, and pay it back on time. Then, watch your score improve after an initial dip!
Installment Loans Build Credit
There is no doubt about it! Installment loans help build credit when the score factor codes communicate that your profile lacks recent information or activity.
Installment loans are contracts that feature fixed monthly payments over a pre-defined period and could be secured (mortgage, car loan) or unsecured (student loan, personal loan).
Starter Installment Loans
Request a starter personal loan (Sponsored Link) to begin building your consumer report and credit score. If a factor code indicates that your file lacks recent activity from non-mortgage installment loans, give it the data needed to diversify your profile.
Personal loans are unsecured contracts that you repay monthly in equal monthly installments. You can make your starter amount small ($500) to ensure that you repay the lender on time, which is key to building your credit score.
Report to Bureaus
Verify that the lender will report the starter installment loan to all three credit bureaus (Equifax, Experian, and TransUnion) before completing the application. The new account will build your profile diversity and cause the lack of recent information factor code to disappear from the scores sourced by all three agencies.
The lenders that report to all three bureaus are usually those that offer personal loans with monthly installments. However, this is not always the case with payday lenders who make cash advances with a single payment due after one or two weeks.
Unsecured personal loans are often the best type of installment contract for building credit because you can borrow small amounts, do not need collateral, and can use the money as you wish.
The other common types of installment contracts are not ideal for consumers who are just getting started.
- Mortgages are secured by the equity in your home but require significant down payments and sizable closing costs
- Car loans are secured by the equity in your automobile and also require a hefty down payment
- Student loans are unsecured arrangements, but most applicants defer payment until after graduation
- Bill payments (utilities, rent, insurance) can build credit but often at only one bureau and with specialized scores
Installment Loans Hurt Credit Temporarily
Taking out a new installment loan will temporarily hurt your credit score, even when the factor code indicates that your file lacks recent information.
However, your rating’s long-term effect is positive, provided that you make every payment on time and according to terms.
The hard inquiry associated with your installment loan application will hurt your credit score by about five points for a short period. The negative effect will last for about 45 days or 180 days, depending on the lending decision.
A hard inquiry acts as an early warning signal that a new account might be opening soon. Once the score has data about the pending decision, the inquiry loses its predictive value.
- Approval: the new account appears on your consumer report after about 45 days rendering the inquiry meaningless
- Denial: nothing further displays on your consumer report, and the score assumes a denial after 180 days
Loan Balance Too High
If approved, do not be surprised when the lack of recent installment loan information entry disappears as a credit score factor code only to be replaced by others that suppress your ratings for about six months.
Both of these reason codes will fade away as you make on-time payments.
- The proportion of loan balances to loan amounts is too high: every brand new installment loan begins life with a 100% utilization ratio because the balance owed equals the original amount. As you make payments, the balance will shrink.
- Time since the most recent account opening is too short: the equations like to see at least six months of positive payment history before adding points to your score.