Comparing Installment Loans and Credit Cards: Which One is a Better Option?
If you compare installment loans and credit cards, you must define each first and determine the debts associated with them. Every kind of debt can affect your credit score differently. While you will want to pay off any debt on time, there are some factors in installment loans and credit cards that you want to keep in mind.
What’s the Difference Between these Debts
Installment credit includes a loan a borrower pays back in level payments on a monthly basis. Users can apply for installment loans online and get instant approval. Upon approval, the lender determines the loan amount and this sum remains constant over the term of the loan. Installment loans include car loans and mortgages.
Moreover, credit cards and home equity lines of credit are both revolving credit. It is not issued by a lender in a predetermined amount. Lenders will set a limit on the amount that can be borrowed. But, the amount to be used within the specified limit is the borrower’s prerogative.
Which Debt is More Manageable than the Other?
Often, installment debt is deemed good as it usually results in the purchase of something of value. Also, this debt is relatively stable. On the other hand, credit cards can help with everyday financial needs; however, they can be misused which results in increasing debt. With an installment loan, the borrower knows exactly when their loan term will end.
Credit cards are usually harder to manage. Although credit cards provide flexibility and are easy to obtain, the debt that comes with using them can present financial issues. Those who end up using their cards to buy all kinds of things can face a mountain of debt in a short time. As a result, they may only pay the minimum amount due every month rather than paying off the full balance. Over time, their revolving credit debt goes out of control. With installment loans, they know how much money they have to set aside every month, allowing for simpler budgeting.
Impact of Both Debt on Credit Scores
With an installment loan, borrowers get a fixed rate; instead of the variable one charged on most credit cards. Also, the borrower pays off the debt balance over the loan’s term. A credit card user can carry credit card debt all their life if their habit is left unchecked. But, those who can stop carrying a balance on their cards might be able to have a better standing and higher credit scores.