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Revolving and Installment Debt: What’s the Difference

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Bills may feel like bills, but there is a lot more to payments than you may expect. For example, credit cards and loans are different types of debt. Like other bills, how you handle them has an impact on your credit score, and how you handle them could have an impact on your long- and short-term financial plans.

What’s revolving debt?

Revolving debt is a self-renewing line of credit; you’re not obligated to use the entire credit line – you can use what you want (up to the credit limit) and make monthly payments. Typically, as long as you keep up with payments and stay within the limit, you can keep using it. Credit cards are a prime example: You use the credit, pay the entire balance every month (or the minimum) and continue to tap the line within your credit limit as needed.

Benefit: Flexibility and the ability to carry a balance.

What’s installment debt?

Installment debt, which can include things like personal loans, mortgages and car loans, work a little differently. 

  • First: You get one amount, one time. If you get a personal loan for $50,000, for example, that’s it.
  • Second: Unlike a credit card, where you can pay between the minimum amount due and the full balance, with installment debt, you pay the monthly balance that’s due in full or you could pay more.

Benefit: A payment schedule that will help you pay off your bill in full by a specific date.

See how you could simplify your credit card debt into a single loan with a fixed rate.

Weighing when to use revolving or installment debt 

Choosing what type of debt makes sense depends on a number of factors to consider including:

  • Time you may want or need to pay for the purchase.
  • APR and any possible fees.

In short, it’s kind of a “big picture” approach to purchasing.

Say, for, example, you’re spending money on something big, like a home-improvement project. Each of the items you need to buy for this project may be manageable, but you’ll want to look at the total cost of the materials you’re going to be acquiring and using all at once, and think about how you’ll pay the balance off.

If your plan is to pay the whole bill at once then a credit card could be great. If you’re thinking you may want to spread payments out over several months, your card’s APR is 0% and you’ll pay the balance off before a 0% APR expires, that could also be good. (Even better: 0% and no fees.)

But if your plan is to pay things off over time, an installment loan could be worth considering for a few reasons: the APR and fees could be lower than those associated with your credit card. Unlike a credit card, installment loans may also have a fixed monthly payment; knowing what you’ll owe each month may make it easier to weave into your monthly spending plan (aka, a budget). When you’re researching loans, lenders will show you how much your monthly payment will be, which could help you see how that payment may fit into your budget.

How revolving debt and installment debt affect your credit score

Paying bills in full and on time are keys to a good credit score. Your “credit mix” includes the types of debt you’ve handled in the past and shows lenders how you handle different types of debt. It’s part of your credit score but the Fair Isaac Corporation, which created the FICO score, notes on its blog that mix plays a minor part, so adding types of debt to boost your score probably isn’t necessary. 

Staying on top of bills and not maxing out credit lines are more important.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.