revolving creditUpdated: May 2, 2019

Whether it’s to pay for a vacation, car, health emergency or to build up great credit scores to qualify for future loans and mortgages, most of us need to use credit. But is revolving or installment credit right for your needs? Read on to learn the differences between the two and how to make the most of revolving credit.

Revolving credit vs. installment credit

Revolving credit is a flexible style of loan — and one many people will recognize from credit cards. An issuer sets a maximum amount of money you can charge (the credit limit) and you decide how much to use, up to that limit. Repayment is similarly adaptable. The issuer sets a minimum per month and you choose how much to repay, from that baseline to the full balance. Any remaining debt after your monthly payment is carried over to the next month’s bill with interest. That’s why the credit is called “revolving” — it comes back around each month.

Installment credit, on the other hand, is preset. In this case, an issuer provides a loan and you pay it off in increments over time, with interest. This is likely familiar to you from mortgages and car loans. Unlike revolving credit, you can’t carry debt from one month to another. You also don’t have the same flexibility in how much money you can use. Instead of being given a credit limit, you decide the loan size and repayment terms upfront.

An interesting in-between option is open credit. Again, an issuer provides credit (often with a maximum). However, unlike in revolving credit, you must repay the debt in full each billing cycle. Utilities, like electricity, water and gas, are a common example of open accounts. If this type of credit appeals to you, another way to utilize open credit is through a charge card. Charge cards function much like credit cards, but in exchange for paying your balance in full each month and what is typically a high annual fee, they offer high rewards potential and no preset spending limits. One of our favorites is the American Express Gold Card (a NextAdvisor advertiser).

How does revolving credit affect credit scores?

It’s hard to adequately stress how important credit scores are. Because these scores serve as a grade by which lenders determine how creditworthy you are, they can affect your ability to rent an apartment or get a job, as well as your mortgage and loan rates. For that reason, it’s important to understand how revolving and installment credit impact your credit scores.

Credit mix

The first thing to keep in mind is that it’s good to have a mix of credit types. Think of it from a lender’s point of view: if a consumer has a variety of styles of debt and repays them all properly, it increases confidence that they will do the same with yours. For that reason, having both installment and revolving accounts is good for your credit scores.

Credit utilization

The second thing to keep in mind is that revolving credit adds an extra dimension to your credit reports. Installment credit affects your reports in a clear-cut way: if you pay your bills on time, it looks good to lenders; if you are late or delinquent on your payments, it reflects negatively on your likelihood of responsibly repaying future debts.

That’s true of revolving credit, too — overdue payments will hurt your credit scores. However, your management of the debt you carry over to future bills will also involve your credit utilization ratio. This ratio is your total credit balance divided by your total credit limit. In other words, it’s the amount of credit you’re using out of the amount available to you. For example, imagine you can charge up to $1,000 on your card and you carry a balance of $400. That’s a 40% credit utilization ratio. You want your credit utilization ratio to be 30% or lower, but it’s best not to go down to 0%, as you do want to show that you are using credit.

Make the most of revolving credit

Revolving credit can be to your advantage. Having several credit cards open and in good standing can boost your credit utilization ratio by increasing your total credit limit, thereby improving your credit scores. Having the option to carry a balance can really help spread out large payments — whether that’s something planned, like travel, or something unexpected, like illness or injury. Credit cards also offer benefits like cash back, travel rewards and intro APR offers that sweeten the deal.

Even if you don’t plan to utilize the revolving payment system, instead paying off your balance in full each month, a credit card can still be a huge boon to your finances. It’s just a matter of finding the right credit card for your financial goals and spending habits. Not sure which cards are worth their salt? Our credit card reviews can help you find the right card with the best rewards and perks for your needs.
Understanding credit is an important part of wielding it effectively. Learn more about managing your credit by reading our personal finance and credit cards blogs.

Disclaimer: This content is not provided or commissioned by the credit card issuer. Opinions expressed here are author’s alone, not those of the credit card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This content was accurate at the time of this post, but card terms and conditions may change at any time. This site may be compensated through the credit card issuer Affiliate Program.