One of the best ways to improve your credit is to make sure you have a good mix of credit types – both revolving and installment. There is a third type, called “open” accounts, but they usually only get reported to the credit bureaus if you’re delinquent. So, by all means, pay open accounts on time (to keep them off your credit reports), but the only things you want to see on your reports are revolving and installment accounts.
The Difference Between Revolving and Installment Credit
Credit Accounts
Revolving credit: Credit cards, department store cards, gas cards, other retail cards, and home equity lines of credit.
Installment credit: Mortgages, auto loans, student loans, personal loans, and home equity loans.
Credit Limits
Revolving credit: It’s a set amount determined when you were approved for the credit. However, you may request a credit limit increase over time.
Installment credit: The amount of the initial loan is all the credit you get and just because you pay it down doesn’t mean you can charge it back up to the original loan amount.
Balance
Revolving credit: It varies depending on how much you charge and how much you pay off.
Installment credit: The balance only goes in one direction – down. (Unless you stop paying on it and the interest and late fees start racking up.)
Payments
Revolving credit: Monthly payments vary depending on your balance.
Installment credit: Payments are determined from the start, putting you on a set schedule to send in the same amount every month.
Time You Have to Pay It Back
Revolving credit: You have all the time in the world. As long as you’re making your minimum payments, your creditor will let you carry a balance indefinitely. (Not a good thing, but a true thing; pay off those credit cards!)
Installment credit: You are on a payment schedule, with a set monthly payment that will allow you to pay off the balance by a predetermined date.
Credit Utilization Ratio
Revolving credit: This type of credit has the biggest impact on your credit utilization ratio. (Home equity lines of credit are an exception.)
Installment credit: This type of credit is not factored into your credit utilization ratio.
Learn more about good credit management from our Credit Management Cheat Sheet.
