What are the different types of credit accounts?
June 8, 2023 9 min read
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.
Use this guide to learn more about types of credit accounts and the impact each may have on credit scores.
- Revolving, open-end and installment are three types of credit accounts.
- Having a variety of credit accounts can impact a borrower’s credit mix, which is a factor used to calculate credit scores.
- Open-end credit is often referred to as a type of revolving credit, but the definitions can vary.
What is credit?
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. Credit scores are calculated using information from credit reports. This information can help lenders determine borrowers’ creditworthiness.
Some of the factors that might make up your credit scores include:
- Payment history
- Amount owed
- New credit
- Credit history
- Credit mix
Take a closer look at the credit mix category. Having a variety of credit accounts that you manage responsibly can have a positive impact on your credit scores. This is because it shows lenders you can handle paying back different types of credit, which might include revolving, open-end and installment.
What is revolving credit?
Revolving credit allows account holders to access funds 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.
The borrower can either use all the available credit or some of it at a time. They can pay back the balance all at once or incrementally, but they typically have to make at least the minimum payment to keep their account in good standing.
The bank or financial institution typically assesses an interest rate on the balance owned.
Examples of revolving credit
Here are some of the most common types of revolving credit accounts:
A credit card works by offering a line of credit that the borrower can use to make purchases or pay bills. There are different types of credit cards, including travel rewards credit cards, cash back credit cards and student credit cards. And depending on the account, credit cards can be secured or unsecured.
Like other types of revolving credit, the lender—in this case, the credit card issuer—sets a credit limit and establishes an interest rate. Rates can differ depending on how a card is used. And typically, the rate is variable, meaning it can change depending on market conditions.
Home equity lines of credit
A home equity line of credit (HELOC) is a line of credit secured against the value of a borrower’s home, which is used as collateral. Homeowners often use the funds from a HELOC for things like making home renovations. Compared to other types of revolving credit, HELOCs tend to have lower interest rates because they’re considered a secured debt. But that rate is usually variable, unlike home equity loans.
Borrowers can access funds on a revolving basis during what’s known as the draw period, which often lasts from five to 10 years. During that time, borrowers may be required to make only interest payments on the debt. The principal on a HELOC is then typically repaid over 10 to 20 years.
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. Like credit cards, PLOCs typically have variable interest rates. But they tend to have lower interest rates compared to other types of credit.
Unlike a HELOC, a PLOC is often an unsecured type of debt. And this type of loan is typically extended to those with good to excellent credit.
What is open-end credit?
There are a lot of definitions out there, but the factors that distinguish open-end credit have to do with payments, interest and credit limits. Open-end credit can allow the borrower to borrow and pay back funds repeatedly, often with no end date, so it’s sometimes considered a type of revolving credit. However, 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.
Examples of open-end credit
Here are some examples of open-end credit accounts:
A charge card can be used like a credit card, but there are a few key differences. With a credit card, the borrower is able to make purchases or pay bills and then make a minimum payment toward the balance in the next billing cycle. But with a charge card, the balance must be paid in full each month to avoid fees or penalties.
Charge cards generally don’t have a preset spending limit, so this may give the borrower more flexibility. But charge cards don’t necessarily allow for unlimited spending, as there is a credit limit that can fluctuate each month based on the borrower’s payment history.
According to Equifax, an account in collections can sometimes be considered open-end credit. An account can go into collections if a past-due balance is required to be paid in full rather than over time.
What is installment 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-ended. 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, borrowers generally can’t increase the loan amount if needed.
When a borrower makes payments on this type of loan, some of it 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 borrowers may use these funds to finance bigger-ticket items.
Examples of installment credit
These are a few of the common types of installment credit accounts:
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.
Unlike some other types of installment loans, a mortgage may have a variable interest rate rather than be fixed. This is because there are various types of home loans and some may have different qualifying requirements.
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. Borrowers might use personal loans for a variety of things, like debt consolidation, an emergency expense or home remodeling.
Car loans are typically paid back at equal payments over a given period of time. Car loan terms usually range from 24 to 60 months, but some can go up to 72 or 84 months. Borrowers often put down money toward the vehicle, or they may have a trade-in that has some monetary value. From there, the rest of the cost of the car may be financed through a loan—in addition to any fees and taxes.
Student loans are used to help borrowers finance their education. The lender pays the educational institution directly toward the cost of the borrower’s tuition and other fees. Any leftover money can sometimes be used to pay for expenses like books or room and board.
The repayment term typically ranges from 10 to 30 years. There are two categories of student loans: federal and private. And each category has different loan options available. Depending on the type of student loan, the interest rate can be fixed or variable.
How do the different types of credit affect credit scores?
Each type of credit may impact your credit scores differently. But remember, having a variety of credit that you manage responsibly can 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 and 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 and credit scores
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.
Installment credit and 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.
Types of credit accounts in a nutshell
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, Capital One offers a credit card comparison tool 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.