In my post about whether or not you should cut up your credit cards, I mentioned Revolving Credit and Installment Credit. These are two of the most common ways to borrow money, and yet most people don’t understand the differences between them. So I will explain in this quick post.
- treated as an account, with no end date
- typically has a set maximum/limit to the amount which can be borrowed
- you can borrow funds, pay them back, and borrow again (revolving)
- no fixed payment amount; usually the minimum payment is calculated as a percentage of the current balance owed
- monthly payment schedule is common
- interest rates are typically higher, 10-20% APR, current national average rate for credit cards is about 15% APR
- example: traditional credit cards; department store credit cards
- treated as a traditional agreement to borrow funds and then pay them back by a certain date
- defined or set amount is borrowed in a lump sum
- fixed payment amounts on a fixed monthly schedule are common
- interest rates typically lower, national averages for mortgage rates are between 3% and 5% APR
- examples: mortgage, auto, personal, student loans
There you have it. Let me know if you have questions about anything covered in this comparison of revolving credit and installment credit.
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