While cash is king, credit is on the move to overthrowing cash from its throne. For six consecutive years, the amount of credit debt continued to increase. This trend continues to develop and credit debt now has reached over $1 trillion.
This is an all-time high and with more and more people using credit payment, cash might no longer be the more preferred option for paying. In fact, according to The Balance, “studies have shown that people tend to spend more with a credit card than cash”.
The reason for the growing number of credit card users is the benefits of using the credit cards. With credit cards, you have a stronger buying power, security, convenience and much more.
Credit cards even come in different forms such as:
- Standard Credit Cards
- Rewards Credit Cards
- Balance Transfer Credit Cards
- Charge Cards
- Student Credit Cards
- Secured Credit Cards
Each card isn’t equal and comes with their own set of perks.
Moreover, with credit, you are able to build your credit score. The purpose of the credit score is for lenders to see if you are a lending risk. If you have a good or higher credit score, you have better credit options and lower interest-rate charges.
Meanwhile, if you have a low credit score, you can be charged with higher interest rates and you have less credit options. This is why even without needing to use credit, one of the reasons why people use their credit cards is to build their credit score.
If you don’t know what your credit score is or if you’re unsure, you can use free to use tools such as Credit Sesame to know your credit score. More than letting you know your credit score, it also helps you in monitoring it, giving you protection and financial advice.
With credit, there are 2 forms. Each of which affects your credit score. They are:
- Installment Credit
- Revolving Credit
Knowing more about the two types of credit can help you better know which credit payment method to choose and or prioritize to achieve a high credit score. Here’s everything you need to know about revolving vs installment credit payment.
When you get a loan, you can get it either through a revolving credit account or an installment credit account. With an installment credit account, there is a determined amount that you have to pay over the course of a certain time frame until you’ve paid the loan in full.
With installment credit payment, you are to pay a fixed amount each month. This goes on until the total credit debt has been paid. Think of installment credit as borrowing a lump some of money.
You are then to pay a fixed amount per month until you’ve completed paying the loan in full. The advantages of installment credit accounts is that you can choose the length of time or have the option to extend it for a lower payment scheme per month.
However, longer time to pay and lower cost per month can mean higher interest rates. You can use this advantage of having predictable payments for easier budgeting. Some examples of installment credit are:
- Mortgage loans
- Auto loans
- Student loans
Another benefit of having an installment credit account according to Investopedia is that “installment credit is considered less dangerous to your credit score than revolving credit”. This is because with installment credit, credit utilization, which is a big factor when it comes to credit score, doesn’t come into play.
According to Experian, credit utilization make up 30% of your credit score. However, with installment credit, you still have to be diligent with paying on time as payment history is an even bigger factor that affects your credit score. It accounts for 35% of it.
A revolving credit account gives you a line of credit with a certain limit. This means that you can keep on borrowing from the account as much as you want as long as you don’t exceed the maximum limit.
The most common form of revolving credit is the credit card. With a credit card, you have a credit limit and you can keep on using the credit card as often as you want as long as you don’t go beyond your credit limit.
The advantage of using a revolving credit payment method is that it’s flexible. You can borrow less or more money as long as it’s within your credit limit. However, you can end up paying higher interest rates with revolving credit.
If you fail to pay on time, creditors could even further increase the interest rate. Moreover, using over 30% of your credit balance can lower your credit score. These are the challenges that come with using a revolving credit account.
Now that you know the difference between revolving vs installment credit payment, you can become more aware of the advantages and dangers that each one has in store. Becoming well-informed about credit allows you to use it to create a positive impact in your life.
Know that credit was designed to make life more convenient. Learn more about credit so you can take full advantage of this powerful financial system. It has been a game changer for a lot of people. It can be the same for you too.