Revolving Credit Vs. Installment Loans

Revolving Credit vs. Installment Loans

When it comes to your credit report and credit score, it is important to know that there are two types of credit that can affect your score and your report. The first type is known as revolving credit. The other type of credit is referred to as installment loans. Here you will find more information about each of these types of credit and how it can affect your score.

There are pros and cons to both types of credit. However, if you are trying to build your credit score it is a good idea to consider both revolving credit options as well as installment loans as they each offer something different as far as scores on your credit report.

Let’s look at each type of credit more closely.

What Is Revolving Credit?

Revolving credit refers to a credit line where the consumer will pay a commitment fee and then will be allowed to use the funds provided as they are needed. Often times a revolving credit line will be used for operating purposes.

What is Revolving Credit

The amount of a revolving credit line can fluctuate each month based on the current cash flow needs of the customer. Both individuals and corporations can take out a revolving line of credit.

A Further Break Down Of Revolving Credit

The idea behind revolving credit is quite simple. A bank and a consumer will come to an agreement. This agreement will include a maximum amount that the consumer can borrow. Along with paying the commitment fee, corporate borrowers will have to pay interest expenses and consumer accounts will be charged forward charges.

There are several factors considered by financial institutions before issuing any type of revolving credit to a consumer. For individuals, the financial institution will look at a credit score, current income, as well as employment stability.

For corporations and other organizations looking for revolving credit, a financial institution will review the organization’s income statement, statement of cash flow, and balance statement.

Revolving Credit Uses

Revolving credit can be useful for both entities and individuals that have unexpected expenses or experience sharp cash balance fluctuations from month to month. The flexibility and convenience of a revolving credit account also comes with a higher interest rate.

Most revolving credit lines will come with a variable interest rate that is adjusted depending on the time and the situation.

Different Interest Rates

Revolving credit typically comes with variable interest rates that may be adjusted.

Examples of Revolving Credit

With a revolving credit account, the credit limit will be set by the financial institution. This credit limit will be the maximum amount that they agree to lend to either an individual or a business.

The most common forms of revolving credit accounts include personal lines of credit and home equity lines of credit.

Revolving Credit Versus Credit Cards

Most people think of credit cards when they consider a revolving credit account. However, there are several differences between a business credit card and a revolving credit account.

The first and perhaps biggest difference is that a revolving credit account does not require a physical card be used for credit. Second, there is no specific purchase required by a revolving credit account. Money from a revolving credit account can be transferred into a bank account at any time for any reason.

Credit Cards vs Revolving Credit

Revolving credit accounts are more similar to a cash advance as the funds will be available up front. In addition, the interest rate for a revolving credit account is often lower than the interest rates charged by credit cards.

If you currently have a revolving credit account and would like more information about how you can pay it off more quickly, you can choose a revolving credit calculator in order to help you determine your payment calculations.

What Is An Installment Loan?

Now that you have a better understanding of what revolving credit is, it is time to look more closely at what installment loans are.

The term installment loan refers to both commercial and personal loans that are provided to borrowers. These loans can include any type of loan that will be paid back using a regularly scheduled payment plan.

Animated Loan

Each of the payments made on this type of loan will typically be the same amount each month and will include payment towards the principal amount that was borrowed as well as payment for the interest that has accrued on the debt.

When it comes to installment loan payments there are several variables that determine the amount of each payment. This includes the amount of the installment loan, the interest rate that will be charged on the loan, and the term or length of the loan.

The Basics of Installment Loans

There are many different examples of installment loans including personal loans, auto loans, mortgages, etc. With the exception of some types of mortgages, most of the time an installment loan will have a fixed interest rate. This means that the interest rate for the entire loan will remain the same.

Since the interest rate stays the same, payments each month are typically the same amount. This makes it easy for the borrower to budget in advance for each payment.

Installment loans may be either non-collateralized or collateralized. An example of a loan that is collateralized is a mortgage as the house is being used as collateral for the loan. Another example is an auto loan as the car that is purchased is considered collateral.

Collaterals of Credit Gone Wrong

There are some types of installment loans, such as a personal loan, that are provided to a person without any type of collateral being necessary. These loans are provided based on the creditworthiness of the borrower. Interest rates are typically higher for loans that are provided without collateral as there is a higher risk of non-payment accepted by the lender.

Applying For Installment Loans

In order to apply for an installment loan a person will need to fill out an application that is provided by the lender. Typically, it will be required to specify exactly what the loan will be used for.

In addition to the interest fees that will be paid over the course of the loan, a borrower will often have to pay other fees as well. These include application fees, loan origination fees, and possibly other charges such as late payment fees.

Be Aware  of Installment Loans Additional Fees

Often a borrower will be able to save money on an installment loan by paying off the loan before the term set in the agreement is over. It is important to look closely at the loan paperwork as some loans will charge a prepayment penalty.

Revolving Credit Accounts Vs. Installment Loans

As you can see there are several differences between revolving credit accounts and installment loan accounts. The main difference between the two types of credit is that an installment loan has a set number of payments that will be made over a set amount of time. A revolving credit account simply requires a payment of the interest and the fees on the money that is borrowed.

Essentially, a revolving credit account implies that a company or individual has been approved for a loan. New loan applications and credit reevaluations are not necessary for using revolving credit.

Credit Accounts And Your Credit Score

One thing that you need to consider when choosing different types of credit accounts is the damage that these accounts can do to your credit score. You already know that in order to have a good credit report you need to have several credit types in your account. Chances are you already have both installment accounts as well as revolving accounts open right now.

If you do not pay your bills on time it is going to hurt your credit score. Your payment history plays a large role in determining your credit score so make sure that you pay all of your bills on time.

Revolving credit accounts can weigh quite heavily on your credit score. A large part of your credit score is the percentage of what you owe on your different accounts. It is important to make sure that you do not use more than 30 percent of your available credit at any time if possible.

Keeping your credit utilization below 30 percent can help improve your credit score overall.

Your credit accounts are significant when determining your credit score. Not only do you need to make sure that you pay all of your bills on time, ou also need to make sure that you keep track of how much credit you have used.

While both installment accounts and revolving accounts impact your overall credit score, a certain type of revolving credit, in particular your credit cards, are especially influential. Make sure that you take care when using them and carefully keep your credit score in check.

Paying Down Debt

When it comes to paying down your debt you might be wondering which type of credit you should pay off first, either the installment loans or our credit card debt. Typically it is going to be recommended that you pay down your credit card debt first. This is true even if your credit is on a balance transfer car at 0 interest.

Installment loans are paid in a set amount each month. Credit cards carry a minimum payment each month that can fluctuate based on the outstanding balance of the account.

Paying Credit Cart Debt

Prioritizing your credit card debt over your installment loan debt is important for several reasons. The first has to do with your credit score. When you are paying down your credit card you will reduce the amount that you owe on your account and thus increase the amount of credit that you have available.

This means that you are lowering your credit utilization. A lower credit utilization may result in a higher FICO score.

When you are paying on an installment loan it will reflect well on your credit report, but it does not have as big of an impact on your credit score as lowering your credit utilization will.

Another thing to consider is that your credit score uses the different types of credit that you have open in order to determine your score. Having installment loans and paying them on time thoughout the life of the loan can help improve your credit score.

When trying to pay off debt it is important to focus on the interest rates. You will want to compare the different interest rates you are charged by each of your credit cards as well as your installment loans.

Try to pay off the highest interest cards first. Generally speaking your credit cards are going to have higher interest rates than any type of installment loan that you have open. This is perhaps one of the best reasons to pay off your credit cards first.

Conclusion

When it comes to revolving credit versus installment loans, there are pros and cons to each type of debt. Realistically, it is good for your credit report and credit score to have some of both types of debt.

Revolving credit debt shows that you can make payments on a revolving debt and not go overboard when it comes to spending money on credit. Having revolving debt can be very good for your credit report as long as it is used wisely. However, it can also ruin your credit score if you are not careful.

Pay Your Debts Regulary

Installment loans are a great way to prove that you can make a payment on time each month. This type of debt involves a monthly payment be made at the same time each month. This is a great way to prove you are capable of making payments on time and seeing a contract through.

Overall, if you are trying to pay off your debt, pay off high interest credit cards first and then follow by making extra payments on your installment loan if you can.

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