First, let’s take a look at the definitions:
Revolving credit is a line of credit that is made available to you for use at any time. So, this would include credit cards, HELOCs, department store cards, etc. You have some sort of limit on it, but you can use all or a part of that up to the limit as long as you would like. When you repay a portion, it means you once again have that amount available to you.

Your credit limit with revolving credit is based on your credit payment history and income. If you use your credit line, you must make monthly minimum payments to pay it back. Some revolving credit lines have an annual fee, others do not.

Revolving credit is the kind of credit people get into trouble with. It is a convenient way to borrow, but it often will become an endless pit of minimum payments and barely paying the interest, let alone the principle. Also, with revolving credit, the interest can be 18% or higher, so it is much higher then an installment credit payment.

One trick of revolving credit is that as you pay off your debt, the minimum payment is also reduced. So, this often will extend the time it takes to pay off the debt, and increases how much you end up paying in interest.

Revolving credit, does have its advantages. It is no doubt convenient, and it eliminates the need to carry a lot of cash. It is also a quick way to establish you as a creditworthy risk for future loans, say if you want to eventually buy a car or house. Another benefit is that you are sent itemized monthly statements which can be useful to you when you want to track your expenses. However, all of the advantages go out the window if you do not have the self control to only use it when needed, and comparison shop first.

Installment debt is the kind of debt you get into with a big ticket purchase such as a home or a car. It is a debt where you take out a specific loan amount, and you have an interest rate on it, a term for repayment of the loan, and the payment is amortized so that you pay equal payments over the life of the loan.

Installment debt offers lower interest rates and an amortizing repayment schedule, which means that you spend a lot less then you would buying the same thing with revolving credit.

Let’s just look at an example. Let’s say you get an installment debt loan for $2,500 and your twin gets a revolving debt loan for $2,500.

Because yours is installment, your interest might be 8% or 9%, but let’s say 10% for the sake of being as accurate as possible.

Your twin has an interest 18.5% on their credit card.

Your installment loan sets up an amortization schedule for you to repay your debt in 4 years.

Your twin, making the minimum payment would spend 30 years paying off the same debt.

You would pay $544 in interest over the life of the loan.

Your twin would pay $6,500 in interest over the life of the loan.

As you can see, installment debt has its advantages.

Obviously for something like groceries, and little things you intent to pay off at the end of each month with your paycheck, getting an installment loan makes no sense. But for cars, houses, or any purchase that exceeds you monthly income, installment debt is the best debt option, even if it does not offer the same flexibility or convenience of a credit card.

A revolving line of credit, also called “open-ended credit,” is made available to you for use at any time. Examples of revolving credit are credit cards such as Visa, Mastercard, and department store cards. When you apply for one of these cards, you receive a credit limit based on your credit payment history and income. When you use the credit line, you must make monthly minimum payments based on the total balance outstanding that month. Some lines of credit will also have an annual account fee.

While revolving credit is a convenient way to borrow, it can also become an endless pit of minimum payments that barely cover the interest due. Many cards charge annual rates of interest of 18% or higher. As you pay off your debt, the minimum payment is also reduced, thus extending your payoff period and, consequently, the interest you pay. Paying just the minimum due on a $2,000 credit card loan could mean making monthly interest payments for 10 or more years!

Revolving credit, in addition to being convenient, eliminates the need to carry a lot of cash and can help establish you as a creditworthy risk for future loans. The itemized monthly statements also can help you track your expenses. But some people can easily yield to the temptation that the convenience of credit cards offers. Impulse buying, failing to compare costs, and purchasing large items you can’t afford are all downfalls brought on by always available purchasing power. Spending more than you earn in any given period is a dangerous practice at best, but doing it over an extended period of time can be financial suicide.

Installment Debt vs. Revolving Debt

Lower interest rates and an amortizing repayment schedule can make installment debt a much cheaper alternative to revolving credit.

Installment Revolving
Beginning Balance $2,500 $2,500
Interest Rate 10% 18.5%
Years to Repay 4 30*
Interest Cost $544 $6,500
*Paying 2% minimum monthly payment.

Sources and Costs of Debt

Source Type of Debt Cost
Banks and Credit Unions Personal, secured Low
Personal, unsecured Moderate
Mortgage Low
Credit Card Low to High
Mortgage Companies Mortgage Low
Department Stores Revolving High
Insurance Companies Personal, unsecured High

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1. If I use an installment loan to pay down my revolving credit card balances, Can it affect my credit score?
2. Advice on Managing Your Credit and Debt
3. tips on using credit wisely

Today debt and instant credit are part of our everyday lives. The convenience of instant credit, however, has taken its toll. Many individuals use credit cards to spend more than they earn, and a few of these people actually build themselves a debt prison from which some never emerge. On the other hand, those who never use credit can be denied a loan or credit when they have a justifiable need or use for it. Using credit establishes a history of financial responsibility: Until you establish a credit history, your chances of qualifying for an important loan, such as a mortgage, are greatly reduced.

What is the balance between using credit wisely and staying out of overwhelming debt? Let’s look at the facts and some pros and cons.

Credit Debt Management – How You Can Benefit

These programs can come in many forms and from many different places, but the common thing between them all is the benefits they provide to those who take advantage of them. Unsure of what a debt management service can do for you? Take a look at the following benefits and find out if it is right for you and what you are really getting when you sign up for one of these programs.

Organizational Benefits

These programs can help you organize your personal finances, by taking the following actions:

Determining how much debt you owe and how much interest will be added onto that debt while you are in the program. They will also try to work with your creditors in order to lower the interest rates on your credit cards and other debts.

Taking your monthly bring home income and subtracting your needed expenses, in order to determine how much you have available to pay toward your bills each month.

Putting you on a 3, 4, or 5 year debt repayment plan. This will be determined according to how much debt you have and how much extra income your have each month to put toward your outstanding debts.

Distributing your monthly payments between your creditors, based on the amount of debt owed. Companies who you owe the most money to will likely get a larger percentage of your payment, in order to ensure that everyone gets paid off within 3 to 5 years.

Educational Benefits

A debt management plan can also help you discover the life rules for staying out of debt, so that you don’t have to deal with this situation ever again. They can also show you what living within your means really is, how to come up with and manage a budget, and what current expenses you should be cutting back on to stay within your monthly budget. The most important thing you need to take away from this experience, however, is responsible spending habits. Otherwise, the entire experience will have been pointless. A budget does not work if you do not stick to it.

Structural Benefits

Just as we need structure as children, so do we as adults; otherwise, things can seem out of control. You may have thought of your debt as being out of control before, but it is very easy to get things under control once you implement a plan. Having someone else help you manage your various bills will keep you from losing or forgetting about the payment, which often results in late fees. This will also make it simpler for you, because you know what amount you are to pay each and every month. You will also know what you need to cut back on in order to have the money for that payment. No more going over your various bills time and time again with a calculator trying to decide what you’re going to pay first and where you’re going to get the money for the rest.

For those who need a way to streamline their personal finances, maintain stability, and want to eliminate debt, a debt management program is a perfect solution that will make their lives better. The only choice you have to make now is which kind of debt management program is best for you and what company you want to sign up with.

How to Improve Credit Scores By Managing Debt
Step1Common sense tells us that the most important first step is to always pay your monthly credit card statements on time. It is more important to pay the minimum payment on time for all of your cards than to try and pay one credit card off totally and let the others become overdue.
Step2Keep the balances on each card under 50% of the total limit for each card. If a particular card of yours has a $10,000 limit, you must keep the balance on this card under $5,000. Take a look at your balances and move some of the debt between cards, even if it means putting some of your big balance card debt onto cards with a higher interest rate.
Step3Watch your statements like a hawk. Checking the statement once a month when you get it in the mail is not enough. Make sure you have online access to your statement(s) and check them often, at least once a week. Identity theft is extremely prevelent and you have to be on the lookout at all times. Checking the statement online offers you the chance to make sure your payment posted to your account and the bank(s) did not misplace it. You can also make sure any credits for returns are on your statement.
Step4Don’t open too many revolving charges or credit cards all at the same time. Opening too many accounts at once has an adverse effect on your credit scores and will make it more difficult to obtain financing for a new house or a car.

Related posts:

1. If I use an installment loan to pay down my revolving credit card balances, Can it affect my credit score?
2. revolving debt vs installment debt
3. tips on using credit wisely