The main types of credit are revolving and installment accounts.These may sometimes also be referred to as open and closed-end lines of credit respectively. Read on for more information about these two types and how applying for these different accounts and how you manage them if approved can affect your credit.
Revolving credit, also known as an open-end credit line, is a type of loan that gives you the ability to borrow amounts of money you choose over time, up to a set limit. You can make a minimum payment and carry — or “revolve” — the rest of your debt from one month or billing period to the next. Or you could pay your balance off in full at each payment period. When you carry a balance on a revolving account, you’ll likely have to pay interest, and in any case there may be other fees associated with the accounts.
Examples of common types of revolving credit are:
- Credit cards
- Personal lines of credit
Some ways revolving credit account can impact your credit:
- When you apply for the account, the creditor will likely review your credit history, typically resulting in a hard inquiry,which could cause a dip in your credit scores
- Opening a new account may also lower your average age of accounts, which might lower your scores.
- Taking out a line of open credit could increase your total available credit, which could lower your overall credit utilization and may help improve your credit health.
- You could also be adding to your mix of credit, which in the long term can improve your credit health.
How you use the account once you have it can have significant impact on your credit:
- If you make at least the minimum required payments on time, you can build a history of on-time payments, which can be a very important factor for your credit scores and overall credit health. Missing payments, however, can negatively impact your credit.
- Another important factor is how much of your credit limit you’re currently using. A lower utilization rate (your total current balances divided by the total of your credit limits) may be beneficial for your credit.
Installment credit accounts, sometimes referred to as closed-end credit accounts, are loans for a set amount of money with a fixed, regularly occurring repayment schedule, and which also likely also include interest and some type of accompanying fees:
Examples of installment lines of credit are loans such as:
- Student loans
- Auto loans
- Personal loans
Some ways installment credit can impact your credit:
- Having a mix of credit account types and paying them off as agreed can show lenders that you can be financially responsible. Lenders may view you as less of a credit risk if you’ve demonstrated an ability to successfully manage different types of credit..
- Taking out any new line of credit will cause a hard inquiry to your account, which can cause a dip to your credit scores.
- Installment accounts close after you pay them off, reducing the average age of your open accounts. This may lower your credit scores, depending on how many other accounts you have and how old they are.
Remember, as with revolving credit, how you use the account once you have it can have significant impact on your credit.