Revolving vs. Installment Credit

Credit means you’re borrowing money from a lender with a plan to repay it later. There are various kinds of credit, each with its own borrowing and repayment rules. Two popular types of credit are revolving and installment credit. Both payments allow you to pay for purchases, though they have different terms and ways of delivering the funds. Lets compare revolving vs. installment credit.

Both types of credit are used when we look at how credit scores are measured and your credit mix.

What Is Revolving Credit?

A revolving credit account lets you borrow repeatedly up to an approved limit and pay back the money over time. Credit cards, home equity lines of credit (HELOCs), and personal lines of credit (LOCs) are examples of this type of credit. These accounts are offered by credit card companies, banks, credit unions, and other financial institutions.

As you repay what you’ve borrowed, your available credit increases again.

For instance, imagine you have a credit card with a $20,000 limit. If you spend $5,000, you’re left with $15,000 in available credit. Once you pay off the $5,000, your limit returns to the full $20,000.

Under a revolving credit, this cycle can continue indefinitely as long as you maintain the account. And the interest is charged only on the amount you currently owe, not on the entire credit limit.

What Is Installment Credit?

An installment loan, on the other hand, is different from revolving credit. The major difference is that it has a set duration to end.

When you agree to an installment loan, you will typically follow an amortization schedule. This outlines how you will gradually pay off the principal with regular payments over time. The loan amount is given to you all at once as a single lump sum.

Examples of installment loans include student loans, auto loans, mortgages, and personal loans.

Here, you will know the exact amount of your monthly payment. You will also know how long you need to keep making payments. If you need additional funds later, you will have to apply for a new loan.

Now that you understand what both involve, let’s look at the advantages and disadvantages of both types of credit.

Revolving Credit

Advantages:

• It is convenient and flexible.
• Credit cards can be used for a wide range of needs and emergencies.
• Making timely payments and keeping your utilization low can help improve your credit score.
• Additionally, some cards provide rewards and benefits, enhancing their value.

Disadvantages:

• It is quite risky and costly.
• Credit cards can lead to overspending and increased debt.
• Late or missed payments, along with high utilization, can damage your credit score.
• High interest rates and fees may apply if balances aren’t paid in full or on time.
• Additionally, consistently making only minimum payments or accruing new charges can trap you in a cycle of debt.

Installment credit

Advantages:

• It is fixed and predictable.
• Installment loans often provide lower interest rates than revolving credit, especially if you have good credit and provide collateral.
• It makes it easier to plan your budget and manage expenses with set monthly payments.
• Consistently making on-time and full payments can help build your credit history and improve your credit score.
• Additionally, you can pay off debt faster. This saves you huge interest since you can make extra payments or pay off a lump sum.

Disadvantages:

• Rigid and limited.
• Installment loans cannot be repurposed for other needs or emergencies without refinancing or securing a new loan.
• Once the loan is paid off, the funds can’t be accessed again.
• Making late, missed, or early payments might result in penalties or fees.
• Furthermore, applying for too many loans or defaulting on payments can damage your credit score.

Comparing Revolving Credit vs. Installment credit

For a better understanding, there is a need to compare these two types of credit. We shall begin with revolving credit.

Revolving credit

You can borrow money, pay it back, and borrow again.

You can only stay within an approved credit limit. 

Generally, the interest rates are higher. 

You only get to pay interest on the amount you actually borrow.

Now, let’s see what installment credit involves.

Installment credit:

The money is given out in one large sum with fixed payments set on a schedule. 

It might be tougher to qualify for this type of loan. 

These fixed payments are made over a set period of time.

This now brings us to the question of which payment type should you prioritize if you were to go for both of them.

Revolving Credit Or Installment Credit, Which Should I Prioritize Paying Off?

The first thing you should check is which type of debt is more costly. Ideally, paying down both revolving and installment credit simultaneously is best. But, your financial circumstances might not always allow this.

A key factor you should consider is whether the debt is secured by an asset. Such assets include a house in the case of a mortgage. These tangible assets adds an extra layer of consideration in your repayment strategy.

Understanding revolving credit vs. Installment credit can help you make financial decisions that work best for you.

Summing It Up

To sum it up, please note that your payment history is crucial to your credit score. Therefore, it’s essential to make all your monthly payments on time. Late or missed payments on either revolving or installment credit can harm your credit. 

On the other hand, consistent on-time payments can gradually improve your credit score.

Nevertheless, before applying for new credit, it’s a good idea to check your credit score first. And if necessary, take some time to improve your credit, which can help you secure the best rates and terms when you do apply.