The debts that appear on your credit report are typically sorted into two different types: revolving credit and installment credit. These debt types can affect your credit in different ways. But what’s the difference between revolving credit and installment credit? We break it down below.
What is Revolving Credit?
Revolving credit extends a fixed line of credit to borrowers, who can then use it to make purchases at their own discretion. There is no specified end date for revolving credit, and borrowers typically have the freedom to use it and pay it off as they see fit (though they will be responsible for monthly payments on any balance they hold).
The most common type of revolving credit is a credit card, though a home equity line of credit (HELOC) operates in a similar way. You can make purchases against your line of credit up to the limit, and you will need to pay down your debt to get access to any credit that is currently in use. Your credit limit will typically remain the same unless the creditor decides to adjust it at your request.
There is no fixed monthly payment, but there is a monthly minimum payment that is calculated based on your balance and any interest you accrue on your purchases. Revolving credit accounts generally offer lower borrowing amounts and higher interest rates.
What is Installment Credit?
Installment credit involves borrowing one lump sum that charges interest, with the borrower making a set number of fixed payments over time until the balance reaches zero (depending on the type of loan, payments can fluctuate over time). Examples of installment credit include car loans, mortgages, and student loans.
With installment credit, there is a predetermined length of the loan and an end date. For example, a 30-year mortgage is set up to be paid off, in full, within 30 years of the borrowing date. You can reduce the amount of time it takes to pay off installment credit by paying extra.
What is a Healthy Credit Mix?
Having the right mix of installment credit and revolving credit can help your credit score. A mix of installment and revolving credit shows that you are able to handle multiple types of loans, and this can benefit you.
One way to make sure you have a healthy credit mix is by keeping track of your information through credit report monitoring.