How revolving credit affects your credit score

When you’re hit with an emergency expense like a flat tire, a broken bone or a leaky roof, how do you pay for it? If you’re prepared (and fortunate) enough to have an emergency fund, you’d likely start there — but if you don’t have enough funds on hand to cover the costs, you may reach for your credit card, instead. That credit card is considered revolving credit. These expenses are never ideal, but that’s what revolving credit is for — to use when you need it, whether that’s for a large emergency expense or everyday purchase. On the other hand, when you take out something like student loans or a mortgage on a new house, that’s known as non-revolving credit — also called installment credit. This type of credit is a lump sum which you pay back only once, instead of a revolving line of credit, which you can pay back and then access again. Both types of credit serve different purposes, with varying interest rates, limits and terms. Revolving credit can also affect your credit score in ways that differ from non-revolving credit. We break down what it means to have revolving credit, specifically in the form of credit cards, and what that means for your credit score.

What is revolving credit?

Revolving credit, also called open-end credit, allows you to borrow money on an ongoing basis and then pay it back according to the terms of your loan. With revolving credit, you have a set credit limit, and as you revolve (or carry) a balance, you have a minimum payment you must pay based on a set schedule. While there are other types of credit — like credit lines — that count as revolving, the most common example of this is a credit card. Revolving credit is yours to use any way you want. You choose how much of your available credit limit to use at any given point in time — so long as you follow the lender’s rules about repayment. For a credit card, this means paying your card issuer once a month for at least the minimum payment amount outlined in your card agreement. As you make payments, the amount that goes to the principal recharges the line. You can pay off the entire amount, restoring the line to its original and full amount, or you can just pay what your spending plan will allow—but you must pay at least the minimum payment.

Is revolving credit secured or unsecured?

Revolving credit can be secured or unsecured. Credit cards are typically a type of unsecured revolving credit, meaning the lender doesn’t get a fixed asset if the borrower can’t repay the loan — although while they’re not as common as traditional cards, secured credit cards exist, too. A home equity line of credit (HELOC) is an example of secured revolving credit because the house serves as collateral for the line of credit.

Revolving credit vs. installment credit

Revolving credit differs from installment credit, also called closed-end credit or non-revolving credit, in several ways. Installment credit involves loaning an amount equal to a specific amount, often of a purchase, that you repay in fixed installments. One major distinction to remember about installment credit is that it is a one-time thing. Your loan, once repaid, cannot be tapped again. While you may get another loan from the same creditor, it won’t be a continuation of the first loan but will be a new loan altogether.

Types of revolving and installment installment credit

Here are some examples of both revolving credit and installment credit products:

How does revolving credit affect your credit score?

Revolving credit affects your score in a variety of ways, particularly when it comes to your credit history, credit utilization ratio and your credit mix.

Credit history

Revolving credit, such as credit cards, can be a great way to build credit because they can help you show responsible credit usage over time, which builds a strong credit history. By using a credit card for essentials and everyday purchases and paying at least the minimum amount  — ideally the full balance, if you can — on time each month you are building good credit. However, if you use your credit card recklessly, such as by consistently maxing out your available credit and missing payments, you are establishing poor credit history and negatively impacting your credit score.

Credit utilization ratio

Revolving credit you use from a credit card also has a direct impact on the credit utilization portion of your score. This factor is second only to payment history in importance to your FICO score (worth about 30 percent) and is “extremely influential” to your VantageScore. Credit utilization looks at how much of your total available credit you have used, meaning your total credit across all of your credit cards and other revolving credit products. Experts recommend that your credit utilization ratio be no higher than 30 percent if possible. For example, let’s say you have a total credit limit of $1,000. If you charge no more than $300 per month to your credit card and pay it off in full each month, then your credit utilization ratio will be at or below 30 percent. Installment credit loans do not affect credit utilization because your loan is for a specific amount and, as also noted above, you cannot access the funds again. This is one reason why some people use installment loans to pay off credit card debt. If you can use a loan with a lower interest rate than the rates attached to your credit cards to pay down your debt, you will immediately lower your credit utilization ratio, as long as you don’t close those credit card accounts. If you close your cards, you may increase your credit utilization and lower your score. To find out your current credit utilization ratio, check out Bankrate’s credit utilization ratio calculator.

Credit mix

Having different types of credit contributes to your credit mix. This factor makes up about 10 percent of your FICO score. While that may not seem like much, this factor can make a big difference if you don’t have a strong credit history or a lot of information in your credit file. And when it comes to your VantageScore, credit mix is combined with credit age (or experience) and is considered “highly influential” in its scoring matrix. Having a healthy credit mix is what is best for your credit score. Demonstrating an ability to handle both revolving and installment types of credit responsibly is what the credit bureaus are looking at when they evaluate your credit mix.

How to use revolving credit without hurting your score

Revolving credit, particularly credit cards, can certainly hurt your credit score if not used wisely. However, having credit cards can be great for your score if you pay attention to your credit utilization and credit mix while building a positive credit history.  You can do this by following these tips:

• Make your payments on time, every time. On-time payments are the single most important factor when it comes to calculating your credit score, so as a best practice, always pay your bills on time.
• Make at least the minimum payment every month. In the case of a credit card, you should ideally be paying it off in full each month, but if that’s not possible, make sure you at least pay the minimum as outlined by your issuer. Try to pay more than that if you can — even if it’s just an extra $20 a month — to help you avoid racking up too much interest.
• Keep your credit utilization ratio low. People with great credit scores tend to have utilization ratios in the single digits, but keeping it below 30 percent is a good benchmark to follow in general. If you have multiple cards, consider paying at least one or two just before your statement closes, or at least sooner than the due date. Issuers tend to report account information around the time the billing statement closes, so getting your credit utilization as low as it can be around this time will help your score.
• Don’t neglect your other loans. If you have a mix of credit, make sure you apply these tips to your other credit products, too. You want to show responsible credit usage across the board to keep your score from dipping.

The bottom line

Both installment and revolving credit have a place in helping you achieve the credit score you want. Revolving credit — particularly credit cards — will impact your credit history, credit mix and credit utilization, which is a factor that makes up 30 percent of your FICO credit score. Certain credit cards, like secured credit cards, can be a simple, helpful way to start building your credit if you have no credit history or rebuilding your credit if your current credit score is considered poor.