The US household now has an average of $137,063 in debt. While that’s a horrendous amount of debt to have to carry, not all debt is created equal.
Mortgages are different that student loans, medical debt is different than credit card debt. They each have their different laws around interest rates, bankruptcy, and even their own social stigmas.
Today we’re going to be comparing revolving debt and installment debt. This way you can understand the differences and make the best choice for your financial future.
What Is Revolving Debt?
A credit card is a type of revolving debt. With revolving debt, there’s a certain amount to your line of credit you can take out, or pay it back, more or less at your leisure.
That’s why it’s called revolving because you’re not obligated to pay the balance off in full each month. So long as you haven’t reached the limit to your line of credit, you can keep borrowing.
For more information, check out this guide to revolving debt.
What Is Installment Debt?
With installment debt, you’re loaned the entire amount upfront hand have to pay it back in installments over time. Installment debt includes a car loan, a mortgage, or a major purchase you make payments on over time.
With installment debt, you know exactly how much you’ll be paying back, and when the debt will be paid off in full.
Some installment debt, like mortgages and car loans, are backed by a physical asset, your house or car in these cases. If you fail to make payments, your lender will seize your asset to cover the remainder of the balance.
Why Does It Matter?
Credit bureaus look at revolving debt and installment debt differently.
The biggest credit bureaus look at revolving debt like credit cards as riskier than installment debt. Revolving debt is more likely to negatively impact your credit score.
Credit utilization is the second biggest factor in your credit score, right beneath payment history. But credit utilization only applies to lines of credit like credit cards, not installment debt.
So if you’re maxing out too many cards, this will negatively impact your score, while installment debt will have little effect.
On the other hand, installment debt is relatively stable, especially since it’s tied to a physical asset.
Revolving Debt and Installment Type Are Two Major Debt Categories You Need to Understand
Revolving debt and installment are two different types of debt, each with other types of debt categorized within them. Every type of debt you incur has its own set of laws and consequences for misuse.
Before you take on any type of debt, always do your research to make sure it’s a good fit for you, and you can use it wisely.
Avoiding revolving debt is one way you can start to build your financial success. Following us for more amazing financial tips is another! Keep reading for more great content to help you build the future you dream of.