There are some major differences between revolving credit lines and installment credit lines that influence how fast you can pay off the debt. Here’s what you need to know about each of these options:
Revolving Credit Lines
Credit cards, store-branded cards, and gas cards are a few examples of this kind of financing option. Revolving credit lines can vary depending on how much you choose to use them. For example, if you have a credit limit of $1000, you could have a balance $100 or $900. This can be significant for a few reasons. Making minimum payments on a higher balance will stretch out the amount of time it takes to pay off. Also, a certain percentage of your credit rating is based on balances owed, so having high balances on multiple credit cards can affect this rating negatively.
Credit card interest rates can also vary widely depending on your credit card agreement. Sometimes missing a payment may cause your interest rate to increase from the original or introductory rate, and this will increase the total amount you have to pay back.
Installment Credit Lines
Installment loans are loans which have set equal payments for a specific term. Personal installment loans and mortgages are two common types. Personal installment loans typically have an interest rate that is set at the beginning of the loan term and doesn’t change throughout the life of the loan. Mortgages have both standard rates, which you lock in and do not change, and adjustable rates or ARMs. For most personal installment loans, the interest rate and payment amount do not change for the life of the loan. Because of this, installment loans may be easier to budget because their payment is set and doesn’t change based on the balance like most credit cards do.
Summary
It’s fine to use both revolving credit and installment credit, as having a good credit mix is also part of how your credit is rated. It is recommended with credit cards that you keep the balance manageable and always pay more than the minimum payment. Also, as with any type of credit, it is important to fit your payment into your budget and always make it on time. This will have a positive effect on your credit rating and keep you from incurring late fees or unnecessary rate increases when applicable. In the end, good credit habits lead to better credit, which can lead to better interest rates. This can be especially important on major purchases, such as your home or vehicle, where the amount of interest you pay over the life of the loan will be substantial.
Want more resources regarding this topic? We've created a page called Personal Loan Basics to provide you with more information.
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