Installment vs. Revolving Credit

For most homeowners, taking out a mortgage means taking on a very large sum of debt – which can be nerve-wracking! But not to worry, because in the world of credit, having a home loan is considered “good debt” in that it has the potential to increase your net worth and provide significant value to the borrower.

This leads us to the two types of debt – installment and revolving – and why creditors prefer one over the other.

Installment Credit

Installment credit is a fixed loan where you borrow a specific amount that you will make regular, monthly payments toward until it is eventually paid off. Common installment credit includes student loans, auto loans and, you guessed it, a mortgage! Assuming you pay your amount due each month, installment debts are seen as less risky to creditors because, as long as payments are made on time, there is an eventual pay-off date.

Revolving Credit

Revolving credit is a line of credit that is open for you to use as you wish with payments that fluctuate each month. A credit card is a prime example of revolving debt as you can make payments while also accruing new charges. Having too much revolving debt can affect your credit negatively as it can easily get out of hand and there is no clear path to paying it off completely.

As you go through the homebuying process, you may notice a small ding to your credit score at first but after several months of on-time payments, buying a home can potentially boost your credit significantly!

To learn more about our home financing process, visit our website today!