What Is the Difference Between Installment Loans and Revolving Accounts?
January 6, 2019 | By Louis Tully
When it comes time to make all those really big (but necessary) life-sized purchases, your credit will be the ultimate deal breaker. The house you live in, the car you drive, or even the business you’re hoping to start up someday are all dependent on your credit history. For better or worse, there are a lot of contributing factors that can impact your credit score. The biggest of these include your revolving accounts and your installment credit (installment loans).
So, what exactly is revolving and installment credit? Revolving credit comes from all those credit cards you may have stuffed in your wallet. The latter counts for things like your car payment or your mortgage. Unless you’re a financial wizard or you’re fortunate enough to have financial help from your parents, both types of credit are essential to life.
Even though both credit types are similar in nature, there are some important differences you should be aware of. While it’s true that revolving accounts and installment credit both involve borrowing money from a bank (which you also pay interest on), there are also many other important factors which make these two forms of credit very different from each other.
Understanding these key differences will help you to maximize your credit score and also your ability to borrow at more affordable rates.
What are revolving accounts?
Since credit cards are the primary form of revolving accounts, the way in which you use them is tentative. For example, though you may be approved for a specific amount in the beginning, that amount can be changed down the road. Whether your credit line is increased or decreased is determined by how you use it, or by your own request. Not only that, but you get to choose how much you use.
You can max out your credit on day-one, or more commonly, charge little by little. You can pay off your credit balance at the end of every month, or you could pay it down slowly over time. The choice is yours.
Since payment history is by far one of the biggest factors on your credit score, you’ll want to make sure you’re at least making the minimum required payment on time, every time. Missing even one payment can leave a nasty mark on your credit report, thus lowering your score.
Another big factor in your credit score is the amount that you owe. Your credit utilization ratio compares how much you owe on all of your credit cards and compares that debt with the leftover credit you still have at your disposal. Having balances that exceed 30% of your credit line could put a dent in your credit. However, the money you owe from installment loans doesn’t affect this part of your credit.
What are installment loans?
Installment credit is more direct than revolving accounts. When it comes to installment credit, you’re borrowing a fixed amount of money. The payments are also fixed (though you are allowed to pay more than the fixed monthly payment amount). Upon taking out an installment loan, you’ll know exactly how much you will owe, how much the payments will be, and how long it’ll take to pay it off. You’ll also know exactly how much you’re expected to pay in interest. Auto loans and mortgage loans are primary examples of installment loans.
Like revolving accounts, payment history on installment loans will also have a big influence on your credit. But as long as you’re diligent enough to make those payments on time, you’ll subsequently be improving your credit score. Failing to make timely payments will have the opposite effect.
Other account alternatives
Other types of credit accounts that can make or break your credit include charge cards and service credits. Charge cards are not the same as revolving accounts. Unlike normal credit cards, charge cards require you to pay off their balance at the end of every month. Not doing so could result in unwanted fees and a lower credit score.
The other kind of credit account that the major credit bureaus recognize are service credits. A common example of a service credit would be your electric or water bill. The company providing the electric or water company charges you a monthly fee in order to continue using their services.
Why are installment loans and revolving accounts important?
Having both installment loans and revolving accounts on your credit report not only helps to improve your score, but could also help you get fairer rates on future loans.
Remember this: Even though making larger payments looks good to the credit bureaus, having less revolving credit in the first place looks even better. By keeping yourself dedicated to lowering your balances overall, you can be assured that your credit score will soar along with your ability to borrow more for a house, a new car, and even your very own business.
The bottom line
Your credit is important, very important. Not having good credit can put your whole life on hold indefinitely. Use the above information to start budgeting a comeback to improve your score today.
In the meantime, if you suffer from bad credit, there’s still an alternative way to get the cash you need fast. Right now, online installment loans are readily available to individuals who suffer from bad credit or have no credit to work with in the first place. Get started today and see how installment loans could help you find immediate relief in just four easy steps.