As you make the payments, the balance of the account lowers. Common examples of installment accounts include mortgage loans, home equity loans, and car loans. A student loan is also an example of an installment account.
Installment and revolving accounts are two different types of accounts involving credit. Though similar, there are some important differences between the ways these accounts work and how they impact your financial life. By understanding the differences between these types of accounts and how the credit bureaus consider these debts, you can better manage your credit score and improve your ability to borrow at better rates. Click here for more info and examples of installment loans:
When you open an installment account, you borrow a specific amount of money, then make set payments on the account. When you take out the loan, you know the amount of the payment and how many payments you'll need to make to pay off the account. As you make the payments, the balance of the account lowers. Common examples of installment accounts include mortgage loans, home equity loans, and car loans. A student loan is also an example of an installment account.
A revolving account allows you to borrow an amount up to a specific limit. For example, if you have a credit card with a $5,000 limit, you can borrow any amount up to $5,000. The payment amount on a revolving account varies depending on how much you borrow. As with an instalment account, the balance decreases as you make payments. However, unlike an instalment account, you can choose to continue borrowing against the account as you make payments. In addition to credit cards, other examples of revolving accounts include home equity lines of credit and accounts with overdraft protection.
In addition to instalment and revolving credit, the credit rating company Experian recognizes two other types of credit: charge cards and service credits. A charge card works like a standard credit card, except that you must pay off the account’s balance in full each month. A service credit exists when you make an agreement with a company to pay a bill monthly. A common example of service credit is electrical service. The electric company charges you each month for the electricity that you use and requires you to pay the bill in full.
Having a mix of installment and revolving accounts can help you build your credit score. This will help you to obtain credit and receive credit on better terms, both of which can help you to grow your business. Though the amount of payments remaining on an instalment loan is a factor that credit bureaus use when setting your credit score, a bigger factor is the amount of revolving credit you're using. By paying down your balances on revolving accounts, you can improve your credit score by lowering both your total debt as well as improving your percentage of available credit.
Sharon Martin is a blogger and writer. She loves to travel and writes.