Different types of credit & how they impact you

Credit can allow you to do a lot of things. One is to offer flexibility in your budget—beyond cash you have on hand or what’s in your checking account. But the way you borrow and pay back credit differs depending on the type of credit. In general, there are three main types of credit accounts: revolving, open-end and installment. 

Use this guide to learn more about the different types of credit accounts and the impact each may have on credit scores. 

What you’ll learn:

• Revolving, open-end and installment are the three main types of credit accounts.

• Each type of credit account can impact credit differently. But when they’re managed responsibly, they can improve your credit scores.

• Credit cards are an example of revolving credit. With responsible use, credit cards can be a useful tool to help you build your credit scores.

The three main types of credit are revolving, open-end and installment. Credit refers to the ability to access funds from a lender and pay them back later. Credit activity is often reported by lenders to the three major credit bureaus, which then summarize the activity in a credit report.

With revolving credit, funds can be accessed up to a certain credit limit. The account can be continuously borrowed from and paid back as long as the account is open. And if an account holder remains in good standing, the bank or financial institution may offer a credit limit increase.

You can use all the available credit or some of it at a time. And the balance can be paid back all at once or incrementally, but you typically have to make at least the minimum payment to keep the account in good standing.

The bank or financial institution typically assesses a variable interest rate on the balance owed.

Here are some of the most common types of revolving credit accounts:

• Credit cards: A credit card works by offering a line of credit that you can use to make purchases or pay bills. 

• Home equity lines of credit: A home equity line of credit (HELOC) is a line of credit secured against the value of your home, which is used as collateral.

• Personal lines of credit: A personal line of credit (PLOC) has a set credit limit, and funds can be accessed and repaid over and over again during the draw period.

Open-end credit accounts can be borrowed from and paid back repeatedly. And while there are a lot of definitions out there, the factors that distinguish open-end credit have to do with payments, interest and credit limits.

Open-end credit often doesn’t have an end date, so it’s sometimes considered a type of revolving credit. But with open-end credit, the amount borrowed is typically paid back in full at the end of each billing period. And certain types of open-end credit accounts don’t have a predetermined credit limit.

Because there’s not a balance being carried over, some types of open-end credit don’t assess interest. But with other types of open-end credit, interest is typically only assessed on the amount borrowed.

Here are some examples of open-end credit accounts:

• Charge cards: A charge card can be used like a credit card, but with a charge card, the balance must be paid in full each month to avoid fees or penalties.

• Collection accounts: An account in collections can sometimes be considered open-end credit.

Installment credit refers to loans that are paid back by making equal regular payments—typically on a month-to-month basis and often at a fixed interest rate. This type of credit is closed-end. This means the loan is for a specific amount of money with the expectation that it will be paid back by a preset date. Because this type of credit has a predetermined amount, the loan amount generally can’t be increased if needed.

When payments are made on installment loans, some of the payment is applied to the principal—or the amount that was originally borrowed. The rest of the payment goes toward any interest assessed on the loan. Like revolving credit, installment loans can either be secured or unsecured. And these funds may be used to finance bigger-ticket items.

These are a few of the common types of installment credit accounts:

• Mortgages: A mortgage can be considered a type of installment credit because in most cases the funds must be paid back within a certain period of time—typically 15 to 30 years. With a mortgage, the home itself is used as collateral, so interest rates tend to be lower. 

• Personal loans: Personal loans are typically paid back within a predetermined period at a fixed interest rate. The funds are usually distributed as a lump sum and generally don’t require collateral to secure.

• Auto loans: Auto loans are typically paid back at equal payments over a given period of time. Auto loan terms usually range from 24 to 60 months, but some can go up to 72 or 84 months.

• Student loans: Student loans can be used to help pay for the costs associated with education, and they’re typically paid over a 10-to-30-year repayment term. The lender pays the educational institution directly toward the cost of tuition and other fees. Any leftover money can sometimes be used to pay for expenses like books or room and board.

Each type of credit may impact your credit scores differently. But having a variety of credit that you manage responsibly can improve your credit mix, which may be a positive factor when your credit scores are calculated. 

Here’s how each type of credit account may specifically impact your credit scores:

Revolving credit can affect your credit scores by impacting your credit utilization ratio—or the amount of credit used divided by the amount of available credit. That’s in addition to payment history and credit mix. And all three are credit-scoring factors.

A low credit utilization ratio can show lenders that you can responsibly manage your existing accounts and aren’t overextending yourself. Making on-time payments on revolving credit accounts can also positively influence credit scores. And adding a revolving credit account to your financial portfolio could improve your credit mix.

Open-end credit accounts that don’t have a predetermined spending limit typically won’t affect your credit utilization ratio. But on-time payments made toward the account can have a positive impact on your credit scores.

Making timely payments on an installment loan can boost credit scores over time. That’s because payment history is one of the main factors taken into account when credit scores are calculated. Adding an installment loan can also help improve your credit mix. 

But unlike revolving credit, installment credit doesn’t typically have an impact on your credit utilization ratio. This is because the loan is set at a predetermined amount. And once paid, the funds can’t be tapped into again.

The three common types of credit—revolving, open-end and installment—can work differently when it comes to how you borrow and pay back the funds. And when you have a diverse portfolio of credit that you manage responsibly, you can improve your credit mix, which could boost your credit scores. 

If you’re considering opening a revolving account in the form of a credit card, you can compare Capital One credit cards to find the right one for you. You can even get pre-approved to see what you qualify for—and it won’t hurt your credit score.