Installment Credit vs. Revolving Credit: Understanding the Key Differences

When managing personal finances, it’s crucial to know the differences between installment credit and revolving credit. 

Installment credit and revolving credit have significant differences in terms of borrowing, repayment, and impact on credit scores. When you understand their differences, along with their pros and cons, you’ll be able to use them effectively to achieve your short term and long term financial goals. 

KEY TAKEAWAYS:

• Installment credit refers to an arrangement in which borrowers receive a specific amount of money from a lender upfront, is repaid over time in fixed amounts known as “installments” and include mortgages, auto loans, student loans, and personal loans. 
• Revolving credit provides borrowers with access to an ongoing line of credit, where the credit limit is often based on various factors such as income, credit history, and repayment capacity, and borrowers are expected to make regular repayments on the amount borrowed. 
• Managing a mix of installment credit and revolving credit accounts is beneficial for maintaining a healthy credit profile and allows individuals to showcase their ability to manage various financial obligations.

When faced with the decision about what kind of debt one should use to meet their financial needs or achieve their financial goals, it’s crucial to understand that there is no one-size-fits-all answer. 

Below, we’ll cover installment credit versus revolving credit, exploring their definitions, examples, and the effects they can have on your credit score and financial well-being.

Installment Credit: Borrowing a Lump Sum

Installment credit refers to an arrangement in which borrowers receive a specific amount of money from a lender upfront. This borrowed sum is repaid over time in fixed amounts known as “installments.” 

Typically, installment loans have a predetermined repayment period, such as monthly payments over a specific number of years.

Common examples of installment credit include mortgages, auto loans, student loans, and personal loans. 

Mortgages are often used to finance home purchases or refinancing, while auto loans are used to purchase new or used vehicles. 

Student loans help cover educational expenses, including tuition fees and living costs. 

Personal loans, on the other hand, offer flexibility for various purposes such as home renovations, medical bills, or debt consolidation.

One notable characteristic of installment credit is that once the loan is paid in full, the account is usually considered closed. If you require additional funds in the future, you would need to apply for a new installment loan.

Revolving Credit: Access to an Ongoing Line of Credit

Revolving credit provides borrowers with access to an ongoing line of credit. 

Unlike installment credit, which offers a lump sum, revolving credit allows borrowers to borrow funds as needed, up to a predetermined credit limit. 

The credit limit is determined by the lender based on various factors such as income, credit history, and repayment capacity.

With revolving credit, borrowers are expected to make regular repayments on the amount borrowed. 

While minimum monthly payments are required, borrowers have the flexibility to choose the amount they wish to repay. However, if the full balance is not paid, interest is charged on the remaining amount. 

The credit limit replenishes as borrowers make repayments, allowing them to borrow again as needed.

Credit cards are the most common example of revolving credit. They provide individuals with an ongoing line of credit that can be utilized for everyday expenses, large purchases, or unexpected emergencies. 

Personal lines of credit and home equity lines of credit (HELOCs) are also considered revolving credit options.

Impact on Credit Scores

Both installment credit and revolving credit play a significant role in determining credit scores and credit history. 

A credit score is a numerical representation of an individual’s creditworthiness, providing lenders with an assessment of their risk in lending money. 

Several factors contribute to the calculation of credit scores, including payment history, credit utilization, credit history length, new credit accounts, and credit mix.

Installment loans, with their longer repayment periods, offer an opportunity to establish a positive credit history over time. Consistent, on-time payments on installment loans contribute to an individual’s payment history, which is one of the most critical factors in determining credit scores. 

Therefore, responsibly managing installment credit can result in credit score improvements. Conversely, missed payments or defaulting on installment loans can have a negative impact on credit scores.

Revolving credit accounts also influence credit scores, primarily through credit utilization ratio. Credit utilization is the percentage of available credit that borrowers are using at any given time. It is calculated by dividing the outstanding balances by the total credit limits across all revolving credit accounts. 

Lenders generally recommend keeping credit utilization below 30% to maintain healthy credit scores. Higher credit utilization ratios can indicate a higher level of risk to lenders, potentially resulting in lower credit scores.

Maintaining a Healthy Credit Mix

Managing a mix of installment credit and revolving credit accounts is beneficial for maintaining a healthy credit profile. Lenders often prefer borrowers who demonstrate the ability to handle different types of credit. 

By having a mix of credit accounts, such as installment loans and revolving credit cards, individuals can showcase their ability to manage various financial obligations.

It is crucial to borrow responsibly, make timely repayments, and keep credit utilization ratios in check to maintain a healthy credit profile. By doing so, you can optimize your financial well-being and access favorable borrowing opportunities in the future.

Seeking Debt Relief When Credit Accounts Become Unmanageable

If you have installment or revolving credit accounts that have become unmanageable, it’s important to know that you are not alone. There are resources available to help you understand your rights and explore debt relief options. 

By proactively addressing your financial situation, working with debt specialists, and seeking legal advice when needed, you can regain control over your finances.

If you are struggling with installment credit or revolving credit problems, we encourage you to seek guidance from certified Debt Specialists, such as those at Americor, who can provide personalized advice tailored to your specific needs.

By taking proactive steps, you can put an end to your financial stress and work towards a brighter financial future. Remember, there is always hope for debt relief, and our team of experienced professionals are ready to guide you on your journey to regaining control of your finances.

For more information on Americor’s debt relief services, contact us today to see how we can help you pay off your installment credit and revolving credit accounts, and get on the fast-track to becoming completely debt-free!