Differences Between Revolving Credit and Installment Credit

Credit allows you to borrow money based on an agreement that you’ll pay it back later. Whether through a personal loan, credit card, or line of credit, it gives you the ability to finance major purchases and handle unexpected emergencies.

There are two main types of consumer credit: revolving credit and installment credit. This Tower Loan article explains the differences between installment vs. revolving credit so you can choose the right kind of credit for your financial needs.

What Is Installment Credit?

An installment credit definition is a credit account that lets you borrow a sum of money and then pay a lender back in fixed amounts, usually each month. Installment credit has a predetermined length. Your loan term is over when you’ve paid the whole amount back that you borrowed.

Key features:

• Lump sum
• Fixed amount borrowed
• Fixed monthly payments
• Defined end date

Examples of installment credit are mortgages, student loans, car loans, and personal loans.

What Is Revolving Credit?

Revolving credit gives you access to an ongoing line of credit that you can borrow from as needed within a certain credit limit. A revolving credit account can remain open indefinitely and allow you to make minimum payments or more each month. Interest rates typically apply if you don’t pay your balance off in full each billing cycle.

Key features:

• Flexible amount up to your credit limit
• No fixed terms
• Reusable source of funding
• No end date

Revolving credit examples include credit cards, home equity lines of credit, and personal lines of credit.

Side-by-Side Comparison of Installment vs. Revolving Credit

Feature	Installment Credit	Revolving Credit
Loan Amount	Fixed lump sum	Credit limit reused repeatedly
Repayment Term	Fixed duration	Ongoing/indefinite
Monthly Payments	Fixed	Variable (minimum required)
Interest	Typically lower	Typically higher
Flexibility	Low	High
Impact on Credit Score	Improves with on-time payments	Improves with low utilization and on-time payments

Pros and Cons of Credit Types

Now that you understand the answers to “What is installment credit?” and “What is revolving credit?” let’s dive into the pros and cons of each one.

Installment Credit Pros

One of the biggest perks of installment credit is the predictability. With installment credit, you’ll have predictable monthly payments, a fixed amount to pay back, and fixed loan terms to follow.

Installment credit typically comes with lower interest rates than revolving credit, so you may pay less money overall with this option. Many people find it easier to budget their money when they choose installment vs revolving credit. When you take out an installment loan, you’ll also build your long-term credit history and be in a stronger financial position for the future.

Installment Credit Cons

However, there are some drawbacks to installment credit, especially if you require a lot of flexibility in your funding. For example, installment loans often require you to make the same amount in monthly payments each month. This could be an issue if you have a fluctuating income and can’t commit to a predictable payment schedule.

Some people find that it’s harder to qualify for installment credit with bad credit. However, at Tower Loan, we help people with less-than-perfect credit get the money they need every day.

You will need to complete a new loan application to obtain additional funds once an installment loan is paid in full. Tower Loan makes the application process quick and easy with online loans that deliver cash without ever leaving your house.

Revolving Credit Pros

Revolving credit is a good option for many people because of the flexible access to funds. You can pay different amounts each month based on your income and cash flow. It can also be convenient to continue reusing your available funds up to a credit limit without having to reapply for additional funding.

Revolving credit examples like credit cards are useful in emergencies when you don’t have time to deal with an application process and need to simply swipe a card to pay for something urgent. They are helpful with short-term cash flow issues and a familiar type of credit most people already use.

Revolving Credit Cons

When you have a revolving credit account, you will likely face higher interest rates than with installment credit. If you leave high balances on your account, you run the risk of harming your credit utilization ratio. This matters because it could impact your future purchasing power when you want to buy a house, rent an apartment, or get a loan with low interest and favorable terms.

Unfortunately, it’s easy to accumulate debt with a revolving credit account because it’s an option to consistently make low, minimum payments. Doing so can result in an endless cycle of debt that makes people feel trapped or restricted in what they can afford in the long term.

How Installment and Revolving Credit Affect Credit Score

Installment credit helps you build your history and improve your credit mix. Improving these things makes it easier for you to get approved for a loan and qualify for the best interest rates and loan terms. It can also help bring you peace of mind that your score is good whenever you need money quickly through a new loan. However, it’s essential to make all payments on time because if you don’t, an installment loan could harm your credit.

Meanwhile, your credit utilization ratio plays a significant role in revolving credit. It’s ideal to keep this ratio under 10%, but at least maintain it below 30% for good financial health. Similar to installment credit, you’ll need to make revolving credit payments on time to boost your credit score, as late payments will bring it down.

When to Use Installment vs. Revolving Credit

There are certain circumstances in which it makes more sense to use installment vs. revolving credit.

For example, you might choose installment credit if you’re making a large, one-time purchase. When it’s time to buy a new house or vehicle or pay for school tuition, installment credit is an excellent option. With this option, you’ll have predictable payments that you can stick to for many months ahead.

However, it may be best to choose revolving credit if you need more flexibility and greater access to funding on an as-needed basis. If you have a reliable income and can pay off balances quickly and in full, revolving credit is a good choice. As long as you don’t carry balances over until the next billing cycle, you can avoid paying unnecessary, high-interest fees.

Can You Use Both Types of Credit?

For most people, the best approach is to use a combination of installment and revolving credit. Having a mix of installment and revolving credit accounts benefits your overall credit profile and shows potential lenders that you are responsible with money in various ways.

Lenders commonly like to see borrowers who demonstrate they’re able to manage multiple accounts and types of accounts. If you currently only have one type of account, it may be wise to start another kind of account, such as opening a credit card if you only have student loans and a car loan.

Another useful strategy is using an installment loan to consolidate credit card debt while you keep a credit card open for emergencies. In this way, you’ll be improving your financial health and simplifying your life with fewer payments due but ready for whatever life may throw your way.

Debunking Common Credit Myths

There are many myths surrounding credit that we’d like to dispel so that you understand the truth about installment vs revolving credit.

MYTH: All Credit Cards Are Bad.

When used responsibly, credit cards are positive financial tools that can help you manage your cash flow and build your credit.

MYTH: Installment Loans Are Better for Your Credit.

Neither credit type is inherently better, as both serve different purposes. A healthy mix of both is ideal for building a strong credit profile.

MYTH: Paying Off a Revolving Account Hurts Your Credit Score.

In fact, paying off a revolving credit account, such as a credit card, can often help your credit score. Lenders like to see that you’re able to use credit and pay it back responsibly.

MYTH: A Payday Loan Can Be Both Installment and Revolving Credit.

Some people wonder, “Is a payday loan installment or revolving?” The answer is neither.

Payday loans are short-term, lump-sum loans that you must pay back quickly, often just after your next payday. They do not allow for borrowing and repayment on demand like revolving credit. Installment credit is repaid over multiple loan terms, months or years, rather than within a week or two like a payday loan. Therefore, an installment loan gives you greater repayment flexibility and access to more funds. 

Contact Tower Loan to Learn More

Tower Loan is committed to helping you learn more about installment credit and revolving credit so that you can improve your financial situation.

If an installment loan is right for you, please visit or call a local Tower Loan branch or apply online today. We offer quick and flexible solutions with our predictable and reliable loans that you can use for any purpose.