Ask Karen Gibbs

Veteran business correspondent Karen Gibbs answers your personal money questions and addresses current topics that affect YOUR finances on a daily basis. Karen is the financial expert in your corner--no question is too basic or too small. Karen boils down the issues simply: here's what you need to know, and here's what you need to do. Send your money questions to AskKaren@mpt.org and post your comments below.

16

May

Revolving and Installment credits, whats the difference?

Karen Gibbs

Karen, I have a couple of questions about credit.  What’s the difference between revolving and installment credit?  Do I need to use my credit card frequently to keep my credit score in good standing?

- Tanisha, Owings Mills

Credit cards

Great questions, Tanisha, showing you’re thinking smart about your money.

First, revolving credit is open-ended credit.  It renews itself as the debt is paid off.  For example, your Visa card is an example of revolving credit.  You may have a $1,000 credit limit on that card.  You charge $100 this month. Now you only have $900 credit left on that card.  When you pay that $100 owed your limit goes back up to $1,000.  Other examples of revolving credit cards are store brand credit cards and HELOCs or home equity lines of credit.

Installment loans, on the other hand, are finite loans, meaning they had a definite start and end point.  Your student loan, auto loan and even your mortgage (if you have on) are examples of installment loans.  You have an initial balance, interest rate charged and length of time for the loan.  That total owed is then divided into equal payments over the life of the loan until it is paid off.  If you want more money, you have to take out another loan.

Installment loans carry weight in your credit score as it shows how you handle debt over time.  Do you pay the required amount on time or are your payments late?  Creditors want to see a good repayment history before lending you money at the average interest rate.  Late payment histories leave you vulnerable to much higher rates.

The key to good credit is paying at least the minimum required, and pay it on time.  I can’t stress enough the importance of paying your bills on time.  Most creditors charge you a late fee for missing the payment date and some may even raise your interest rate because you missed the due date, costing you even more money and making it difficult to secure credit from other lenders.

One other factor to consider is how much debt you carry relative to the amount of credit you can access.  Called the credit utilization ratio, it shows how much of your available credit you’re using.  Let’s say you have a $1,000 limit on your credit cards.  Ideally, you should owe no more than $300.  Lenders want to see your credit utilization rate at less than 30% of your available credit line.  Higher than that, you may be in danger of paying much higher interest rates or not getting that loan at all.

Bottom line, keep your credit manageable.  Pay off the entire amount monthly if possible.  If not, pay at least the minimum due (I suggest more than the minimum) and pay no later than the due date.   There are many free online apps that will help you with money management, including paying bills on time. 

 

Do your research and good luck!

- Karen

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