Securing funds with credit has become a norm. It has allowed people to be financially secure while making big purchases and needing to spend on emergencies. Most borrowers, however, don’t know there are two different types of credit: revolving and installment credit.
Both types of credit have pros and cons for various reasons, and it’s important to know which one to go with depending on the situation.
What is Revolving?
Revolving comes up with credit cards and lines of credit that allow you to spend as much as you like within the credit limit. Revolving money allows you to borrow constantly as long as you don’t hit the limit or constantly fail to pay your credit card bill.
As to how revolving credit affects your credit score, it either pulls it up or down depending on your credit utilization rate, how regularly you pay your bill, and whether you do so in full.
What is Installment Credit?
With installment credit, borrowers are given a lump sum of money that should be repaid in installments in a clearly defined payment schedule. Examples include personal expense, student epense, and mortgages.
A bank or money lender Singapore and other countries provide installment credit for borrowers. But before they do, they assess first each borrowers’ credit report to see if they have a good track record of making payments on time in the past. In the case of money lenders, they also look at other factors such as employment and salary.
Pros and Cons Between Revolving and Installment Credit
Both have advantages and disadvantages, depending on the individual’s needs, eligibility, and financial habits.
Interest Rates
Pros
- Revolving: Borrowers able to pay their monthly bill in full will not be charged any interest. It is because many banks compete with one another in the credit card market, and adding interest rates on fully paid credit card bills will put them at a disadvantage.
- Installment credit: Installment credit usually has low interest rates. This usually prevents potential borrowers from being afraid of exorbitant costs for taking out a loan.
Cons
- Revolving: Although revolving credit doesn’t charge interest rates when paid in full, they can be pretty hefty for those who fail to do so. In fact, for partially paid credit card bills, revolving credit has higher interest rates than installment.
- Installment credit: Even though it has a lower interest rate than a credit card, the interest amount of long-term payments can be quite high when added up.
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The Loan Amount Could Be Utilized
Pros
- Revolving: The amount is determined by a predetermined limit and is flexible. Even when the credit card bill is not yet fully paid, the borrower can still use the credit card for other purchases. While not advisable, a borrower can repay only the minimum amount in times of financial difficulty, and then pay in full in the next billing cycle.
- Installment credit: The amount of borrowers’ owed is the same each month.
Cons
- Revolving: It is very easy to swipe a credit card, so holders must be careful not to reach the limit or else they won’t be able to use the card.
- Installment credit: The amount of the business does not change over time as it’s already been disbursed.
The Flexibility and Cycle of Payment Schedules
Pros
- Revolving: Like a cycle, once the borrowers repay the amount they have borrowed, that amount will be available to be borrowed again in the next period. Credit card holders can also pay just the minimum and then pay in full later on. It is because revolving credit doesn’t have a fixed amount and ends the cycle of credit like installment credit does.
- Installment credit: The payment schedule is more predictable because borrowers already know when and how much they have to pay each month. This should help borrowers manage their finances accordingly and be ready for the payment.
Cons
- Revolving: While it sounds more flexible because revolving only gives a minimum payment rather than fixed monthly payments that are adjusted, it actually lacks structure. Those unable to regularly pay in full will rack up interest amounts over time.
- Installment credit: Since installment has a fixed monthly payment that cannot be easily adjusted, it can be a struggle to pay during financially difficult times such as unexpected unemployment or emergency expenses.
Also, unlike revolving credit, where you can pay early, some lenders may charge a penalty if the borrowers pay off the money early.
How Usage/Borrowing Affects Credit Score
Pros
- Revolving: Revolving credit score usage affects credit score depending on the credit card holder’s utilization rate and the borrower’s payment habits. By maintaining a low utilization rate and making timely payments in full, those relying on revolving credit will be able to maintain or improve their credit score.
- Installment credits: Regular, timely payments on a business also maintain or improve creditworthiness. This is especially true for those who successfully manage a mix of credit types, including revolving credit.
Cons
- Revolving: The lack of a structured schedule can give undisciplined credit card users problems. Their credit score will be negatively impacted if they eventually can’t commit to payment.
- Installment credit: Like in revolving credit, failure to pay regularly will negatively impact credit score.
Conclusion
Revolving and installment credit have the same purpose, which is to provide access to funds through credit, but differ in how they’re given and used. Both have pros and cons, and it’s important to understand both types of credit to be prepared, anticipate any future problems, and determine which type fits them best depending on their need and ability to handle debt responsibly.
