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What is the difference between installment credit and revolving credit?

Regular Contributor

What is the difference between installment credit and revolving credit?

Can anyone tell me simply? LOLSmiley Very Happy
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Moderator Emeritus

Re: What is the difference between installment credit and revolving credit?



itzateach wrote:
Can anyone tell me simply? LOLSmiley Very Happy


With an installment loan, you borrow a certain amount once and then pay it off over a predetermined period of time, usually with a fixed monthly payment that includes principal and interest.  Once the loan is repaid in full, the account is closed.  Examples of installment loans are auto loans, mortgage loans, student loans, and most personal loans.
 
With a revolving account, however, you are issued a line of credit that you can access anytime you want to.  After you make a payment towards the amount you have borrowed, that amount becomes available for you to borrow again.  For example, if you have a credit card with a $1000 limit with a balance of $100, your available credit on that card is $900.  If you make a $50 payment, your available credit goes up to $950, because the amount you just paid is once again available to you to borrow.  Credit cards are the most common example of revolving accounts.
 
Hope that helps!


Message Edited by cheddar on 07-17-2008 07:41 PM
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Message 2 of 4
Regular Contributor

Re: What is the difference between installment credit and revolving credit?

Thanks, makes perfect sense to me....but wouldn't a HELOC be more like an installment loan? It's funny that it reports as revolving (although I guess technically it is just a line of credit and not a 2nd mortgage), right?
Message 3 of 4
Community Leader
Legendary Contributor

Re: What is the difference between installment credit and revolving credit?

itza, just to add to the excellent explanation given by Cheddar, be aware that FairIsaac is aware that many HELOC creditors incorrectly report them as revolving credit.  As long as FI can identify it as a HELOC, they assure that it will not be scored as revolving credit.
Message 4 of 4