revolving creditUpdated: Dec. 21, 2018

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? We detail our favorite cash back, low APR and travel card below.

Cash rewards credit card

Cash rewards credit cards allow you to earn cash back on purchases you were already planning to make. Some cards earn more on groceries, while others reward you for dining out or making everyday purchases. Since the rewards can vary quite a bit, we opted to detail a card that earns a respectable cash back rate on all purchases.

Chase Freedom Unlimited

revolving creditIf you expect to spend $500 within 3 months, you’re in luck. That’s because as a Chase Freedom Unlimited cardholder, you’ll earn a $150 bonus after spending $500 on purchases in the first 3 months — that’s a 30% return on investment! You’ll continue to earn cash back at a consistent 1.5% rate on all purchases, a pretty sweet reward for making your regular purchases — plus, it’s unlimited and automatic! That cash back won’t expire, provided your account is open and in good standing, and you can redeem it in any amount for a check, gift card or statement credit.

On top of the cash back rewards, you’ll also have 15 months of 0% intro APR on purchases. That’s like getting a loan on new purchases with no interest for over a year. The 15-month 0% intro APR applies to balance transfers as well, though there is a balance transfer fee of 3% or $5, whichever is greater. If you’re paying high APR on your current card, 15 months of 0% APR can be well worth the 3% fee ($5 minimum), saving you money and giving you some time to pay off the debt. You’ll also pay no annual fee, making Chase Freedom Unlimited a straightforward pick for those looking to earn cash back.

Travel credit card

The added flexibility in credit limit and repayment can be a huge convenience for big ticket, infrequent purchases like travel. If you carry a travel rewards credit card, your purchases can fuel further vacationing.

Capital One Venture Rewards Credit Card

revolving creditIf you’re looking to earn lots of miles and take that trip you’ve been dreaming of, the Capital One Venture Rewards Credit Card should be in your wallet. That’s because you’ll earn a whopping 10 miles per $1 spent on hotel bookings through (this offer lasts until Jan. 31, 2020) and 2 miles per $1 spent on all other purchases. We know the 10-mile rate can dwarf the rate on all purchases, so we’re stressing it again: you’ll earn unlimited 2 miles per $1 on all purchases you make! Only a few travel credit cards offer that kind of rate, and they rarely also offer such a massive rate in a specific category.

As if that isn’t enough, you can even earn 50,000 bonus miles after spending $3,000 on purchases within the first 3 months of account opening. If you plan on booking flights and hotel rooms within the first 3 months of getting your card, that purchase requirement isn’t too hard to responsibly reach. When you redeem the bonus for travel, it’s worth $500!

Another exciting aspect of those miles is Capital One’s new mile transfer benefit. You’ll have the option to transfer miles to at least a dozen partner airlines at an exchange rate of 2 Capital One miles for 1.5 airline miles. That isn’t the best mile exchange rate we’ve seen (we’re looking at you, Chase Sapphire Preferred!), but it’s still a useful perk that gives the savvy traveler room to take advantage of excellent brand-specific deals. Lastly, this card charges no foreign transaction fees on purchases made outside the U.S. (often a 3% to 5% fee on every transaction), and while Capital One Venture Rewards does charge a $95 annual fee, it waives the fee for the first year.

Low APR credit card

Some credit cards offer low intro APR periods. On purchases, that can be a nice interest-free loan. Or, if your debt is getting high on a credit card, choosing a card with low intro APR on balance transfers can be a terrific way to make your debt easier to pay down while simultaneously improving your credit utilization ratio.

Wells Fargo Platinum Visa Card

revolving creditFor those less interested in rewards than long intro APR periods, the Wells Fargo Platinum Visa Card is the card to beat. Not only will you have 18 months of 0% intro APR on purchases, but balance transfers made within the first 120 days of account opening will also benefit from an 18-month 0% intro APR (with a 3% balance transfer fee on transfers made within the first 120 days, then 5%). That 0% intro APR period, along with the Wells Fargo Platinum Visa Card’s $0 annual fee, gives you plenty of time to pay off big purchases or to get your credit back into fighting shape.

The Wells Fargo Platinum Visa Card also includes a variety of other benefits. One of its more unusual perks is its cell phone protection. Pay your monthly phone bill with the card and you’ll be reimbursed for up to $600 if your phone is damaged or stolen. There’s a maximum of 2 claims per year and a $25 deductible per claim; nonetheless, it’s a nice benefit for just paying your cell phone bill — something you’ll do even if you don’t have this card. You’ll also have access to financial planning tools through My Money Map and optional alerts of suspicious activity via email or text message.

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.