Revolving vs. Installment Credit: What’s the Difference?
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Credit reports may contain a variety of credit accounts, such as revolving credit (renewable credit, like a credit card) and installment credit (level payments over a defined term).
Both types of credit can have a significant impact on your credit score.
Revolving credit vs. installment credit
Revolving credit isn't issued in a predetermined amount. Credit cards are the most common form of revolving credit. You’ll have a limit on how much you’re able to charge, but the amount you use within that limit is up to you. Most revolving loans are issued as lines of credit, where the borrower makes charges, pays them off, then continues to make charges.
Installment credit comes in the form of a loan that you pay back in steady payments every month. The amount of the loan is determined at the time you’re approved, and the sum you’ve borrowed doesn’t change over time. Examples of installment credit include mortgages and car loans.
How does revolving credit affect your credit?
Revolving credit allows you to choose both how much you want to borrow and how much you want to pay, assuming you pay at least the minimum required. Examples are a home equity line of credit and a credit card.
Payment history: It's the single biggest factor on your credit score, so it’s crucial that you make all monthly payments on time. Any missed payments will have a big drag on your credit score.
How of your credit you use: A significant portion of your score comes from your credit card balance. A big variable is your credit utilization ratio, which is how much you owe on your credit card statement compared with your available credit.
Most credit scoring models reward you for using only a small portion of your available credit.
How does installment credit affect your credit?
Installment credit is a little more straightforward than revolving credit.
Payment history is the biggest single factor in determining your credit score. As long as you make all payments on installment credit accounts on time, you’ll be making good progress on building your credit. Likewise, any missed payments will have a significant negative impact on your credit. You won't be making decisions about how big a payment you want to make and, if you are paying on time, every month, your balance will be going down and you will be adding positive information to your payment history.
