Revolving credit and installment loans are two different ways to borrow money other than help with emergency cash. Installment loans can be viewed as a one-time transaction that allows you to borrow a fixed amount. Revolving credit, which includes credit cards and home equity lines of credit, is more fluid.
You’ll be granted a credit limit when you apply for a card. This credit limit can be used to continue borrowing as long as your charges are paid off. You’ll be charged interest on the balance and only that amount. In addition, you will owe a minimum payment to your issuer.
While this offers less predictability and flexibility than an installment loan it is more flexible. Credit cards have higher interest rates than other types of loans, especially if you are eligible for the lowest installment loan rates. You can get into debt if you make only the minimum monthly payments to a revolving account. Revolving credit is best used for emergencies or to pay off large purchases, such as furniture or televisions, that aren’t big enough to justify a loan.
How Installment Loans Affect Your Credit?
Like any other type of borrowing, an installment loan can have a negative or positive impact on your credit score. Here’s how:
History Of Payment: Your credit score will be strengthened if you pay all your installment loans on time. Your credit rating will be affected if you miss or make late payments.
Credit Mix: A mix of credit types can help improve your credit score. You can get a boost to your credit score if you don’t have one. However, you must be approved. You shouldn’t take out a loan that is too expensive for your needs. This is also because a request for a new credit line will result in a hard inquiry into your credit report.
Credit Utilization: The credit utilization ratio plays a significant role in your credit score. It contributes around 30% to your credit score according to FICO. This number indicates how much credit you are using at any given time. Too much credit can harm your score and make lenders worry that you are overburdened. Your credit utilization rate could drop if you have high credit card debts or other loans.
What To Do If You Need An Installment Loan?
An installment loan can hurt your credit score and your budget.
Consider carefully whether your budget can accommodate a monthly payment when you are offered a loan. Think about this: If you are in financial trouble, will you be able still to pay your monthly payments? Are you able to save money for these situations?
Talk to your lender if you are unsure if you can afford the loan’s repayment term. You may need a longer-term to make your monthly payments lower or a shorter loan.
For certain purchases, you may also consider credit cards as an option. Although credit card interest rates are higher than personal loans rates, many cards offer 0% APR for 12- to 18-months. This allows you to pay your balance off without any interest.
However, you should make sure that you are aware of the regular APR. Also, ensure you can afford the payments if your balance is still outstanding when you apply for a credit card. You’ll be able to not only meet your financial goals but also keep your credit score strong by using installment loans and credit cards.