The Important Differences Between Installment Credit and Revolving Credit

Oftentimes, situations arise in which people find that they need a short-term lending solution to cover an immediate financial need. These situations are what is often referred to as an “emergency” – an unplanned need that has to be quickly addressed. When an emergency arises and a short-term loan is needed, it is common for an individual to choose between two credit options. They could use installment credit or revolving credit. Depending on their circumstances; either could resolve their problem.

What are Bad Credit Payday Loans?

Payday loans are loans that will provide those in dire situations with quick access to money, regardless of whether they have bad credit. These types of loans typically need to be repaid when you receive your next paycheck. Because qualification requirements are lenient, and there are no minimum credit limitations, payday loans are typically easy to a

cquire and are an attractive solution for those with bad credit who need emergency funds.

Installment Credit

Installment credit is credit that comes in the form of an installment loan. A borrower applies for a loan for a sum of money, and, upon approval, receives loan funds that can be used to cover their emergency needs. Installment loans gain their name from the repayment schedule that borrowers follow to pay off their debt. The loan is repaid in installments – either weekly, bi-weekly, or monthly, depending on the lender. The repayment period for an installment loan can be several months or more than a year. After the loan is paid off, the account is considered closed. Staying current on repayment of installment loans may positively impact a person's credit score, and this type of closed account in good standing can be a positive item on a person's credit history for ten years.

Revolving Credit

An example of this would be a credit card account with a credit limit. A person who borrows money in this way may carry a balance from month to month. These accounts may be shown as a revolving account on a person's credit report. They will have a maximum balance a person is allowed to borrow from the account. This type of account enables a person to determine how large or small a balance they will carry forward each month. The balance carried forward is charged interest, and this amount will be added to the account's balance.

How Installment Credit and Revolving Credit May Affect Credit Scores

Payment History

Should a person's credit history show any type of late payments for either installment or revolving credit accounts, it can have a negative impact on their credit score. A late payment on either type of account would do similar damage.

Amounts Owed

The amount of debt owed on either type of account can impact a person’s credit score. When it comes to revolving credit, the revolving utilization ratios are important. This is determined by the amount of an account's balance compared to the account’s credit limit. When an individual has a high balance on their account when compared to their limit (high utilization), their credit score may show a downward trend. When a person has a low balance on their installment credit account (low utilization), the impact on a person's credit score may be minimal.

Because installment credit is not revolving, utilization is instead a ratio of the loan balance over the loan amount. With installment credit, utilization is always highest when the loan is first opened, and should decrease as installment payments are made. Having low utilization is going to have a better impact on credit scores, so it is important to stay current on payments, and pay off installment loans completely by their loan term end.

A potential borrower looking for a short-term loan should do research to learn more about each of the credit options available to them. After deciding whether revolving credit or installment credit is best for their situation, additional research should be done to find the best lenders and loan products available. For borrowers who are concerned with how opening a new credit or loan account may affect their credit scores, it is important to know that credit reporting practices and policies vary from lender to lender. Potential borrowers should also research the specific credit reporting practices of lenders they are considering. Short-term loans should always be carefully considered before loan or credit agreements are signed, and short-term loans should never be used as a long-term solution for financial management.

The content on this site is for informational purposes only and is not professional financial advice. MaxLend does not assume responsibility for advice given. All advice should be weighed against your own abilities and circumstances and applied accordingly. It is up to the reader to determine if advice is safe and suitable for their own situation.

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