What Is Revolving Credit vs. Installment Credit?
There are two types of credit repayment: revolving credit and installment credit. Revolving credit allows borrowers to spend the borrowed money and repay it, then spend it again, as long as they don’t exceed their credit limit. Installment credit requires scheduled, periodic payments to reduce the amount of principal they owe gradually.
Both types of credit come in secured and unsecured forms, although installment loans are most common.
Understanding Revolving Credit
The most common revolving credit is a credit card, though it can also be a home line of credit. A bank offers these credit accounts under the terms of the Federal Reserve Board’s Regulation Z, which gives consumers specific rights, such as the right to dispute charges.
Charge cards are cards that don’t have a defined credit limit. The issuer will generally bill a charge cardholder’s account monthly, quarterly or annual, rather than on usage.
Open-ended or revolving lines of credit allow borrowers to spend up to their credit limit as they pay down the principal. The most charge that a minimum payment equal to 1 percent of the total outstanding balance be paid each month. The rest of the payment is applied to interest.
Understanding Installment Credit
An installment loan is an agreement to repay a set amount of money over a set amount of time. Typically, this is a loan made by a bank or other lender, with the loan’s interest rate determined by the institution.
Installment loans usually have a clearly defined repayment schedule and interest rate. For example, a 30-year mortgage loan may have payments due every month at a fixed interest rate.
Some homeowners opt for interest-only loans, which are increasingly common. The borrower does not make a down payment and just pays the interest, which the lender takes care of. At the end of the loan term, the borrower can renew the loan and make a down payment or refinance the loan with another lender.
Which Is the Better Credit Type?
As a general rule, revolving credit is better than installment credit, especially if it’s a credit card. That’s because a credit card can be used in an emergency to borrow money and repay it quickly to avoid interest charges. However, it’s not always possible to access a credit card, and that’s why an installment loan is preferable.
However, there are some instances where installment credit is better. If the borrower has a history of repaying debt or good credit, getting a lower interest rate on an installment loan is possible than a revolving credit card. Some people are willing to pay more for installment credit than revolving credit.
Also, some credit cards are more generous than banks, offering no early repayment fees or higher interest rates. If you’re considering opening a credit card, you’ll want to compare interest rates and other rates with several lenders.
Conclusion
There’s a lot to consider when deciding between a revolving credit card or installment loan. It’s essential to understand how revolving credit works and take advantage of credit card rewards. But, if you can’t access a credit card or want to avoid interest charges, it’s better to opt for an installment loan instead.
At First Finance Company Birmingham, lending is our business, and customer service is our ambition. We have been serving Jefferson County since 1998, with our experienced staff eager to listen to every client, with the goal of offering financial help. We make fair, honest, straightforward loans and believe in the value of relationships – especially in times of need. If you need ,installment loans in Birmingham, AL, get in touch with us! Please call to inquire today.