Recurring debt is a term that describes ongoing payments on financial obligations you can’t easily cancel, such as a mortgage payment, child support or a student loan. Technically, the debt doesn’t recur; the payment does. In addition to the amount of principal reduction included in the payment, the interest on the loan is considered part of the recurring debt. Believe it or not, having some recurring debt can improve your credit score. Too much, however, can hurt you. Understanding what recurring debt is will help you manage your personal finances.
Debt considered recurring by lenders includes payments for obligations such as a car, mortgage, student loan, child support and minimum credit card balance payments. If you pay off your entire balance on credit cards each month, these payments don’t count as recurring debt. If you bought a flat screen TV and are paying it off monthly, that’s considered recurring debt because you can’t easily cancel your payments. If you subscribe to a magazine or have an Internet or phone contract, those obligations are not considered recurring debt because there is no fixed debt amount you are paying down and you can cancel your contract.
One way to help determine whether your monthly debt qualifies as recurring is to look at your fixed expenses. Recurring debt usually requires that you make the same payment each month. As you go down the list of your fixed expenses, you should be able to spot those that are loan or credit payments and those that are easily cancelable contracts for services, such as insurance and subscriptions.
Some of your variable expenses reoccur each month, such as groceries and utilities, but they do not qualify as recurring debt because they are not long-term obligations for the repayment of debt. Some recurring debt is variable, such as older mortgage payments that decline as you have paid off interest and credit card payments that vary with your balances.
Impact on Credit
Recurring debt helps creditors and potential lenders determine your debt-to-income ratio. This is the amount of money you owe toward debt repayment compared to your income. The debt-to-income ratio often is used to determine whether you qualify for a mortgage. Knowing what your recurring debts are help you determine if you can pay any of those off to improve your chance to qualify for a home loan. Having some recurring debt, also known as an installment account, helps boost your credit score, because it shows that lenders considered you a good long-term risk.
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