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Monday, September 29, 2014

99. What is the difference between Revolving and Installment Credit?

Often there is confusion over what the difference is between revolving and installment credit. Revolving utilization is a very significant part of FICO scoring - installment utilization is not. A person really wouldn't get much of a FICO boost for paying off installment loans first for example.

Revolving credit is basically when you are pre-approved for an amount of credit at your disposal for discretionary use.  Most revolving accounts will have a pre-specified limit available, while some have an "unlimited" credit limit.  Both monthly balances and payments "revolve" around the debt you have accrued. Typically you can get no interest offers with revolving credit.

Installment credit is basically when you sign a specific contract and receive a certain amount of cash upfront, typically for the purpose of a specific purchase, with specified contract terms for its monthly repayment. Of note you don't have additional, discretionary credit to draw upon. Installment loans can offer no interest offers but are less common.

Most installment loans are secured by personal property, such as a mortgage, auto loan, or other loan. Therefore installment loans are much less likely to become delinquent should times get tough. Revolving is usually the first to become delinquent.

Do you have a better understanding of revolving and installment credit now?  Hope it helps. :-)


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