Installment Loans vs. Revolving Credit: What’s the Difference?
Many people don’t know the difference between installment and revolving credit, even though these are the most fundamental types of credit repayment.
Borrowers schedule periodic payments to fulfill installment credit loans, eventually lowering their debts. In contrast, revolving credit contracts give borrowers access to a credit line that does not have to be paid back in periodic fixed payments. When we look at installment loans vs. revolving credit, we can see both advantages and disadvantages.
In this post, we’ll discuss revolving vs. installment credit options, reviewing how both options affect your credit score. As a result, you’ll be able to decide which is a better option for your financial situation.
Let’s look at an installment credit definition:
Installment credit can be defined as an extension of credit in which scheduled periodic payments are made until the debt is fully paid.
When you agree to an installment credit contract, you’ll be given a predetermined length on the loan and an end date by which complete payment is due. Most installment credit agreements include an amortization schedule, in which the amount owed is gradually reduced via installment payments across several months or years.
There are several types of installment credit, including auto loans, student loans, mortgages, and personal loans. When you are approved for one of these loans, you’ll be told how much your monthly payments will be and how long your payment schedule will last, among other things like your interest rate.
When we compare installment vs. revolving credit, it’s safe to say that installment credit is safer for your credit score than revolving credit.
Revolving credit is a type of non-installment credit.
Revolving credit can be defined as credit that is renewed as the debt is paid. This allows the borrower to access more credit when required.
When we consider credit card installments and credit limits, these are both associated with revolving credit. Lines of credit and credit cards are familiar forms of revolving credit.
Your credit limit stays the same as you make payments towards your revolving credit account. You are allowed to borrow more money as often as you want, as long as you stay within your credit limit. As you are not borrowing a lump sum when you open a revolving credit account, there is no installment plan.
Instead, you have the option to borrow up to a predetermined amount. That said, this flexibility is often associated with lower borrowing amounts and higher interest rates compared to installment credit. Unsecured revolving credit interest rates are usually set around 15-20%. However, this interest rate may increase if you fail to make payments.
How Do These Types of Credit Affect Your Credit Score?
- Installment Loans
Each installment loan shown on your credit report extends your credit history. As long as you complete payments on time and regularly, in the total amount agreed to in the loan terms, installment loans will positively impact your credit score. Successfully cleared installment loans reflect your ability to manage your finances responsibly, which tends to improve your credit score.
- Revolving Credit
In most cases, revolving credit is considered a more dangerous borrowing option than installment credit. Over 30% of your total credit score is your credit utilization rate (which relates to how close your card balance is to your credit limit on each card). Therefore, carrying high balances on your revolving credit assets can lower your credit score.
When we compare revolving credit vs. installment loans, neither option is better than the other, and they are both important for your overall credit score.
That said, revolving credit can matter slightly more than installment loans.
Installment loans help to prove that you can consistently pay back borrowed money over time. However, revolving debt (credit cards) shows that you can borrow and repay month-on-month, manage your personal cash flow, and clear debts.
Lenders are more interested in your revolving credit accounts than your installment loans. For example, a credit card with a $1000 limit can have a much more significant impact on your credit score than a $50,000 auto loan.
However, it’s essential to pay off both these bills on time every month. On-time payments equate to 35% of your credit score. Credit cards prove that you’ll be a long-term reliable customer in the eyes of a lender.
Tower Loan Can Help
If you’re struggling to manage your finances, a debt consolidation loan could solve your problems.
A debt consolidation loan helps you save money on interest and improve your credit score. The decision to pay off all your debts and consolidate them into one manageable debt could lower your credit utilization ratio.
At Tower Loan, your dedicated loan specialist will calculate every financial detail to create term options that fit your lifestyle. We also offer online loans for bad credit. Contact us today for a consultation!