Different types of credit & how they impact you

The three main types of credit are revolving, open-end and installment—sometimes referred to as “closed-end.”

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

With revolving credit, you can access funds up to a certain amount. Then once you pay down the balance, you can borrow from the account again and again as long as the account is open. 

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.

Revolving credit is often subject to a variable interest rate that is charged against the balance if you don’t pay it off each month.

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

• Credit cards: A credit card offers a line of credit that you can use to make purchases or pay bills. You’ll have the flexibility to spread payments out or pay back the amount borrowed in full each month. How much you can borrow depends on your credit limit.

• Home equity lines of credit: A home equity line of credit (HELOC) is a line of credit that uses the value of your home as collateral for the loan. These types of loans offer draw periods—typically 10 years—that allow you to borrow only the money you need as you need it. Then, once that period ends, you’ll pay back the loan based on the loan terms. You might still make payments on the loan during the draw period, depending on the lender and loan terms. 

• 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. PLOCs are different from HELOCs in that they don’t require an asset like a house.

Open-end credit accounts can be borrowed from and paid back repeatedly. And certain types of open-end credit accounts don’t have a predetermined credit limit. While there are many definitions, 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. 

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. Plus, these cards typically don’t have a credit limit. 

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

Installment credit is a loan that’s 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 considered closed-end. This means the loan is for a specific amount of money with the expectation that it’ll be paid back by a preset date. Because this type of credit has a set 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.

Installment credit may be used to finance bigger-ticket items. Here are a few 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 set 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: An auto loan is typically paid back in equal payments over a given period of time. Terms on car loans can 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. 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. Likewise, making on-time payments on each credit type can improve your credit scores.

Here’s how each type of credit account may 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 set 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 considered 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 amount is preset. 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 check to see if you’ll be approved—and it won’t hurt your credit scores.