You may have heard the terms “revolving credit” and “installment credit” before, but what do these terms mean?
With Revolving Credit you have a limit of how much you can borrow, but can use it repeatedly if you pay some of it back every month. Revolving credit is flexible and convenient, as it can be used for emergencies and helps improve your credit score. However, revolving credit usually carries higher interest rates and fees. If used irresponsibly it can lead to overspending, debt, and a poor credit rating. Credit cards are the most common type of revolving credit.
Installment Credit is when you borrow a fixed amount of money and agree to pay it back in equal monthly payments over a set period. The payments are predictable, which can help you plan your budget. Installment loans generally have lower interest rates than revolving credit but the funds cannot be used for other purposes, and if you’re unable to make the set payment each month, you’ll be hit with penalties and fees, affecting your overall credit score. Examples of installment loans include auto loans, mortgages, and student loans.
