When you hear the word credit, the first thing that probably comes to mind is a credit card. And, for good reason! Credit cards are a very popular form of revolving credit. The truth is, there are actually three types of credit accounts: revolving, installment and open. This article will help you learn more about them so you can navigate the world of finances with confidence.
A revolving credit account allows you to borrow money against a line of credit and pay it back over time with monthly payments, which is often calculated as a percentage of your balance. Revolving credit accounts usually come with assigned credit limits and are subject to finance charges and fees. The types of fees that could be charged depend on the type of revolving credit account and how you use it — remember you’re in control. And, depending on terms of the account, you may be able to avoid interest charges by paying in full each month.
Here are some examples:
Credit Cards: More than just a piece of plastic, credit cards give you the flexibility of making purchases, transferring high-interest rate balances and borrowing cash to help meet your financial needs.
Personal Lines of Credit: A personal line of credit allows you to borrow money as needed up to an assigned credit line, just like a credit card. Unlike unsecured personal loans, personal lines of credit don’t issue funds in one lump sum payment. Instead, you have access to a line of credit, which may be accessible by check or bank transfer.
Home Equity Lines of Credit (HELOC): A HELOC is a revolving line of credit that allows you to borrow against the equity you have in your home. Proceed with caution because HELOCs require you to use your home as collateral. This type of loan is often used by people who need to make significant home improvements.
Installment credit comes in the form of a loan with a fixed loan amount, fixed payments and an established repayment schedule. Unlike revolving credit, installment credit gives you an exact timeframe to pay off what you borrow, generally over a period of months to years. In addition, you don’t have access to available credit like you would with a credit card – you borrow a lump sum, receiving the total amount of the loan all at once.
Installment credit is offered in a variety of ways. If you’ve ever had a personal, student, auto or mortgage loan, you’ve had experience with installment credit.
The least common of the three, open credit — as in a charge card — comes with a credit line that allows you to make electronic purchases like a credit card. Unlike a credit card, charge cards don’t come with interest rates, but you are required to pay your balance in full each month to avoid penalties.