Long-term debts can take on many different forms, from revolving credit to installment accounts, and last for many years. All credit accounts have an effect on your credit reports with Equifax, Experian and TransUnion, which are the three major credit bureaus, and they influence your credit score. Long-term debts have an especially important impact because they show how a consumer handles the account over a long period.
Definition
A long-term debt is a debt that runs for more than one year, according to the Investor Words financial glossary website. Interest is almost always charged on long-term debts, and payments are generally made on a monthly basis until the account is paid in full.
Examples
Many common types of accounts are long-term debts. Car loans almost always run for more than a year while mortgages typically run from 15 to 30 years. The time frame for paying off a credit card varies because a consumer can choose to pay the balance in full, pay only the minimum payment each month or make a variable payment. Many credit card holders handle them as long-term debts. All these account types are reported to the credit bureaus, which means they have an impact on the consumer's credit rating.
Effects
Long-term debts affect a credit rating in two important ways. First, they show a payment history over a significant length of time. The Fair Isaac Corp. (FICO) credit score company says that 35 percent of a credit score is based on payment history. The score is significantly higher if you make on-time payments over a period of several years, while it will be pulled down by each late or missed payment. The length of your credit history accounts for 15 percent of the credit score. Long-term debts boost this part of the score.
Time Frame
The history of your long-term debt should only go back seven years on your credit reports. This means that late or missed payments dating back more than seven years should no longer appear, according to the Credit Info Center website. This stops their impact on your credit score. You can ask the credit bureaus to remove old information if they do not do it automatically.
Warning
Some long-term debts have a continued effect on your credit rating even after they are paid in full. Your old credit card accounts count toward a longer credit history, FICO explains, even when they have a zero balance. You can hurt your credit score by closing them after you have paid off the debt. It is better to make an occasional small purchase to keep the account active.
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