Revolving Credit or Installment Loans: Which is Better for Your Credit?

April 21st, 2017 | Author:

[I]f you’ve been learning about credit, one of the first things you’ll hear is you can’t get credit if you don’t have credit. It often seems to be a Catch-22; no one will give you credit so you can’t get established with a credit history so you can get new credit.

With diligent effort, you can get approved for a credit account. You may need a co-signer to qualify or collateral, but you can get approved. The next question is which kind of credit is best to start out with.

Revolving Credit

Revolving credit means it continues even when you pay off the balance. Credit cards are a type of revolving credit. You’re given a credit limit that you can use over and over as long as you make the minimum payments each month.

To qualify for this kind of credit if you’re just starting out, you may need a secured credit card. This means you pay a deposit, which becomes your credit limit. After so many payments on time, you may get your deposit back.

Because of the continual availability of credit, this type is usually given a lot of attention by lenders. They want to see you’ve been able to manage your credit cards responsibly.

Installment Loans

These are personal loans, auto loans and home loans. This type of credit gives you enough funds to use as you intend, but you must pay it off before you can apply and use it again. Once you have paid it off, the account is closed.

A personal loan is often easiest for a beginner to get, especially if they have a co-signer or collateral they can use. It will likely be only for a few hundreds of dollars, but it can help you establish a credit history.

While lenders don’t look as closely to this type of credit, they do want to see you paid off your debt in a timely manner.
Both kinds of credit are good for establishing a history and it’s good to have a mix, but revolving credit will do more good in the long run.

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