Although you have to pay back any money you owe, not all debt is created equal. There’s installment debt, like an auto loan, mortgage, or student loan, which is paid off in installments. Then there’s revolving debt, which applies to things like credit cards and home equity lines of credit.
Non-revolving and revolving debt affect your credit score differently and can affect your life differently—especially if you get in a hole of revolving debt that’s hard to get out of.
Americans averaged more than $1 trillion in outstanding revolving debt in the past few years, according to the Federal Reserve. The key to managing revolving debt? Understanding how it works and why it’s easy to take on too much.
A Closer Look at Revolving Debt
People often use the term “revolving debt” to mean a credit card balance that is carried over from month to month—and while a lot of revolving debt is carried over and not paid off in full, that isn’t technically the definition of revolving debt.
Revolving debt encompasses all debt that isn’t a set loan amount for a set period. Instead, the amount you owe, and minimum payment required, on, say, a credit card or home equity line of credit changes as you pay some off and take on more debt—like a revolving door.
You can choose to make the minimum payments required by the credit issuer, pay off the entire balance, or pay some amount between the minimum and the total balance. If you don’t pay off the full balance when it’s due, then you will ultimately end up paying more because your balance will accrue interest and finance charges.
For example, if you have a $3,000 balance on your credit card at a 16% interest rate and you make a $100 payment monthly, you’ll take 39 months to pay off the balance and ultimately pay $857 in interest.
Of course, if you continue to charge more to that credit card at the same time you pay only minimum monthly payments toward the existing debt, then it’ll take even longer to pay off.
That’s one of the quiet dangers of revolving debt: If you haven’t reached your limit, you can continue to borrow from your credit line while you still owe money, which adds to your debt and to the amount of interest you’ll have to pay.
And if you don’t pay off the balance in full when it’s due, the interest you owe will be added to your balance and accrue more interest.
What Is Installment Debt?
Installment debt is a loan for a set amount with set payments. Also called non-revolving credit, it can’t be used again when it’s paid off.
Once you pay off a home loan or car loan, for example, it’s closed, and you’d have to reapply for a new loan to borrow more.
When you take on installment debt, you agree to a set payment schedule and a fixed interest rate (or in some cases a variable interest rate that is established in your initial contract). You then make monthly payments until the loan is paid off.
Typically, secured installment debt is considered lower risk to the lender than revolving debt and therefore has lower interest rates. You’re also usually able to borrow larger amounts, depending on your credit history and income, because secured installment debt is often tied to the collateral that backs the loan, such as the car or house the loan is financing.
Installment debt may also affect your credit score differently.
How Each Kind of Debt Affects Your Credit Score
Both installment debt and revolving debt are factored into your credit score. In fact, your credit mix—meaning the different types of debt you carry—determines 10% of your FICO® score .
If you miss a payment on either installment or revolving debt, it could affect your credit score. (A late payment can’t be reported to the credit reporting bureaus until it is at least 30 days past due.)
Then there’s your credit utilization ratio —which means the amount of debt you owe in relation to the amount of credit available to you. If you’ve maxed out all your credit cards, for example, that could be a problem. However, using credit cards to take on small amounts of debt and then pay it all off can help build up your credit score.
Lenders consider revolving credit as much more reflective of how you manage money than installment loans. While having large existing loans can certainly affect the amount banks are willing to lend you, installment debt doesn’t affect your credit utilization ratio as much as revolving credit because there isn’t a larger line of credit tied to the loan.
That means that in order to maintain a healthy credit score, a borrower may choose to focus on paying off revolving debt and not taking on more in the meantime. If you’ve gotten into a revolving debt trap, with your existing credit cards accruing interest and adding to what you owe, then there are a few options to get out of revolving debt.
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Getting Out of Revolving Debt
Revolving debt can be hard to get out of because the interest and finance charges keep adding to your balance.
There are a few ways to ease revolving debt, however. The simplest, though in some ways the hardest, is to make a payoff plan. That requires you to plot out how much you can afford to pay each month and calculate how long it’ll take to pay off what you owe.
One strategy is to pay off the debt with the highest interest rate first and then perhaps consolidate remaining debt to a lower interest rate.
In order to consolidate credit card debt, or really any kind of revolving debt, at a lower interest rate, there are at least two options: balance transfer credit cards and personal loans. (Personal loans are unsecured, meaning they’re not tied to collateral like a house or car. Secured debt is, well, secured by an asset.)
Balance transfer credit cards, though, are simply another form of revolving debt and can reopen that cycle, whereas personal loans are a form of installment debt.
Credit cards are one of the most common forms of revolving debt: You charge some, pay some or all off, and so on. But lots of people get caught in a revolving debt trap if they don’t pay balances off in full each month. A lower-interest personal loan is one possible escape route.
Seeking a SoFi credit card consolidation loan is straightforward. You can apply for an amount from $5,000 to $100,000 and use it for a variety of expenses—in this case, to pay down existing high-interest debt.
And a SoFi fixed-rate personal loan comes with no application fee, origination fee, or prepayment penalty.
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