Installment loans vs. revolving credit: Differences explained

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Credit cards are the most common form of revolving credit, which enables you to borrow up to a particular limit. With revolving credit, you can keep spending until you hit your limit, and you pay back what you borrow each month—or pay interest on any unpaid portion of your balance.

Installment loans, on the other hand, are borrowed as a lump sum and have a fixed payment schedule. Mortgages, student loans and auto loans are all common types of installment debt, which have a specific term and interest rate that determine the monthly payment.

Both types of debt can be useful for building your credit score, though credit cards tend to have a larger effect on your score overall. Read on to learn more about installment loans vs. revolving credit and how to use them to your benefit.

Notable differences between installment and revolving debt

While installment debt and revolving credit are both ways to borrow money, there are key differences between the two.

	Installment debt	Revolving credit
Definition	A borrowed lump sum that is paid back over time on a set schedule	A line of credit that enables for spending up to a predetermined limit
Examples	Mortgage, student loan, auto loan or personal loan	Credit cards and personal lines of credit
Interest rates	Typically fixed when the loan is established	Usually variable, and often higher overall
Payments	Consistent monthly payments on a set schedule	Payments vary based on spending
Effect on credit score	May increase credit score due to improved mix of credit, payment history and length of credit	Tends to have a larger effect on credit score, and score increases are possible with responsible usage

Read on to learn more about each of these two types of credit.

What is revolving credit?

Revolving credit enables a borrower to spend up to a certain limit whenever they choose to do so, and they only have to pay back what they borrow. The most common kind of revolving credit is a credit card, though there are also other lines of credit—like a home equity line of credit (HELOC)—that afford this same flexibility.

Because revolving lines of credit are more flexible and enable you to borrow money up to your limit whenever you need to do so, they tend to have higher interest rates. Lending money on demand is risky for credit card companies, and higher interest rates reflect this increased risk.

Since you can choose to use (or not use) your line of credit each month, there is no set payment schedule. Instead, whatever amount you spend in a month is reflected on your statement. When you pay the entire balance you owe, you don’t accrue any interest—but interest is charged on any unpaid portion of your debt. 

Credit cards can help you build credit, but they also require a higher level of responsibility, since it’s easy to spend more than you’re able to pay. If you do use your credit card carefully, it can lead to an increased credit score that reflects your strong payment history and careful utilization. 

What is installment debt?

Installment debt enables someone to borrow a lump sum of money, which they then must pay back over a predetermined period of time. Installment debt is common for larger purchases—like a house or a car—and may help to build credit by improving your credit mix.

Lenders typically like to see that you’re able to manage several different forms of credit, so handling a mortgage or auto loan while also managing your credit card can be beneficial for your credit score. While revolving credit tends to have a larger effect on your credit score, making on-time payments on installment debts is also important for maintaining good credit. 

When it comes to installment debt, interest rates are typically lower than they would be for revolving credit. Since the lender will check your credit when offering you the loan, they’ll have a strong sense of whether you’re able to pay your debt. Those with higher credit scores tend to get better interest rates on installment debt, and in most cases, interest rates are lower for loans than credit cards regardless of credit score.

Installment debt is helpful for building good credit habits since it involves a set period of time (called the loan term) and consistent monthly payments. 

How can you build credit with installment debt and revolving debt?

Both installment debt and revolving credit can help you build credit and improve your score. Keep in mind the factors that make up your credit score to use these two forms of credit to your benefit.

• Always pay your bills on time. Payment history is the single most important factor in your score. For both the predictable payments of installment debt and the varying payments of revolving credit, paying on time can help boost your score.
• Avoid using all of your revolving credit at once. Credit utilization measures how much of your available credit you’re using. With a revolving debt like a credit card, you’ll want to try to keep your spending to one-third of your limit or less.
• Continue using credit over time. Your score generally increases when you’ve been using credit for a longer period of time. Both revolving and installment accounts can help build your credit history.
• Use multiple types of credit responsibly. Lenders feel more confident in your credit usage if you’re able to manage different kinds of credit. As a result, having both revolving debt (like a credit card) and installment debt (like an auto loan) can benefit your score.
• Try not to open too many accounts at once. Part of your score is determined by how many new accounts you’ve opened in the past year. Be careful not to open too many installment or revolving accounts too quickly—it’s best to build credit steadily over time.

As you work to improve your score, make sure to get a copy of your credit report. Your report will list all of your open and closed accounts—including both installment debts and revolving lines of credit. Look at your report for any accounts that may be fraudulent or inaccurate, as having these on your report could be bringing down your credit score. 

For support, try working with credit repair professionals who can help you dispute inaccuracies with the credit bureaus who issue your report. 

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