Credit is structured either as revolving or non-revolving. Revolving credit is often better for emergency spending and smaller, day-to-day purchases while non-revolving -- or installment -- credit is better suited to large purchases like a car or big home improvement project. But that rule of thumb may not always be the case.
What is revolving credit?
At the most basic level, revolving credit is a loan that can be used more than once. Popular forms of revolving credit include credit cards, personal lines of credit and home equity lines of credit (HELOCs). Revolving credit is also known as open-ended credit or an unsecured loan.
Revolving credit allows you to continuously borrow credit for an undetermined or very long amount of time. You can carry a balance from month to month up to a set credit limit, but the larger the balance you revolve, the greater the monthly payment and interest charges.
You can pay it back and continue to use it. It also has no clearly defined end date. If you pay your balance in full each month, you may not have a monthly payment or owe interest. There’s no set repayment schedule and you’ll always have access to funds up to a set limit so long as your account is in good standing.
What is non-revolving credit?
Non-revolving credit, or installment credit, is your standard loan. You borrow a lump sum and pay it back over a set amount of time. It has a clearly defined end date and a fixed payment schedule with interest already factored into each payment. Examples of non-revolving credit include auto loans, student loans and mortgages.
Once the loan term is complete, you would need to apply for another one to access more funds.
What’s the difference between revolving credit and installment credit?
Revolving credit can be used continuously for an undisclosed amount of time, while non-revolving credit can only be used up to the borrowed amount and must be paid back at set paymentsover a specific amount of time.
Revolving lines of credit are better suited to smaller, day-to-day payments because they could leave you on the hook for funds you don’t end up needing. Overall, it’s a more flexible option which gives you greater control over your funds. They usually have higher interest rates because they are unsecured loans, which means they involve more risk.
Non-revolving credit is better for larger purchases like vehicles, student loans or a large home improvement project. It typically has lower interest rates because it is lower risk for the lender. Installment loans are more akin to investments, they’re secured loans for things like a car or a house.
Both forms of credit require you to fill out an application which will result in a hard credit check. That means your credit score will likely drop a few points (temporarily) as you’re taking on new debt. With revolving credit, you’ll only need to apply once. But if you need another installment loan once your current loan is paid back, you’ll need to fill out another application.
The bottom line
Both types of credit can be beneficial, but which you choose depends on what you’re looking to do. If you’re looking for a way to build credit, have access to emergency funds or make everyday transactions, a revolving line of credit will be the one to choose.
On the other hand, if you need to make a large payment for a one-time purchase like a big project or major life change such as college or a new car, consider an installment loan or a non-revolving line of credit. Just keep in mind that once the funds are used up, that’s it.
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