The three main types of credit: revolving credit, installment loans, and open credit
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What are the Types of Credit?
The three main types of credit are revolving credit, installment, and open credit. Credit enables people to purchase goods or services using borrowed money. The lender expects to receive the payment back with extra money (called interest) after a certain amount of time.
Revolving Credit
A line of credit is one type of credit that comes with a capped limit and can be used up until you reach the predetermined threshold. It may include regular minimum payments, but usually, there is not a fixed repayment schedule. An example would be a credit card as there is a capped limit (the credit card limit), and you can keep using it until you reach such a limit (then over-limit fees apply). Another example would be a HELOC (Home Equity Line of Credit).
For more information on revolving credit, click here.
Installment
Installment loans are another type of credit that includes a fixed payment schedule for a specified duration. An example of an installment loan would be a car loan — you are required to pay a set amount of money at a recurring interval (ex. $280 per month) until the loan is paid off in full. Other examples include mortgages, student loans, and term loans.
For more information, see revolver debt versus installments.
Open Credit
Open credit is a type of credit that requires full payment for each period, such as per month. You can borrow up to a maximum amount, similar to a credit card limit, but you are required to pay the funds borrowed in full at the end of each period. An example of this would be a cellphone bill — you can make phone calls, send text messages, and use data each month, and at the end of the month, you are required to pay for the services you used (including any additional usage fees). Another example would be a utility bill (such as electricity usage in your household).
Questions
Determine which type of credit the following statements refer to.
Q1) Each month, you are required to pay $300 until the loan is paid off in full.
Q2) You are able to borrow up to $2,000 per month but must pay for all the funds borrowed each month.
Q3) You can borrow up to $1,500 per month, but you are only required to make a minimum payment (paying off the loan in full is not required).
Answers
A1) Installment
A2) Open Credit
A3) Revolving Credit
Additional Resources
CFI is the official provider of the Financial Modeling Valuation Analyst (FMVA)®. Here are some additional resources you might find interesting:
FAQs
The four types of credit are installment loans, revolving credit, open credit, and service credit. All of these types of credit increase your credit score if you make your payment on time and if your payment history is reported to the credit bureaus.
What is a credit score answers? ›
A credit score is a three-digit number, typically between 300 and 850, designed to represent your credit risk, or the likelihood you will pay your bills on time. Creditors and lenders consider your credit scores as one factor when deciding whether to approve you for a new account.
What are credit types? ›
The three main types of credit are revolving credit, installment, and open credit. Credit enables people to purchase goods or services using borrowed money. The lender expects to receive the payment back with extra money (called interest) after a certain amount of time.
What types of credit should I have? ›
Having both revolving and installment accounts in your name gives you a good variety, shows you can handle multiple loan types and also boosts your credit score.
What are the 7 sources types of credit? ›
Credit can come in many forms including:
- Major credit cards like Mastercard or Visa.
- Charge cards like American Express.
- Retail credit cards.
- Net 30 business accounts.
- Mortgages (home equity loans, home equity lines of credit, also called HELOCs, cash out refinances, etc.).
- Auto loans.
As someone with a 650 credit score, you are firmly in the “fair” territory of credit. You can usually qualify for financial products like a mortgage or car loan, but you will likely pay higher interest rates than someone with a better credit score. The "good" credit range starts at 690.
Is 600 a good credit score? ›
According to a report from Experian®, the average FICO credit score in America was 714 in 2022. So 600 falls below that national average. On the VantageScore range, the company says 600 scores are considered poor.
Is 700 a good credit score? ›
For a score with a range between 300 and 850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most consumers have credit scores that fall between 600 and 750.
What are the 4 classification of credit? ›
Based on purpose, credit is classified as production loans, investment loans, marketing loans, or consumption loans.
What type of credit score? ›
The two most common credit scoring models are FICO Score and VantageScore. Both are designed to measure how likely you are to be able to pay back debt and are used to inform lending decisions.
There are many different forms of credit. Common examples include car loans, mortgages, personal loans, and lines of credit. Essentially, when the bank or other financial institution makes a loan, it "credits" money to the borrower, who must pay it back at a future date.
What are the two most basic types of credit? ›
Open credit, also known as open-end credit, means that you can draw from the credit again as you make payments, like credit cards or lines of credit. Closed credit, also known as closed-end credit, means you apply for a set amount of money, receive that money, and pay it back in fixed payments.
What is the most common type of credit today? ›
The two most common types of credit accounts are installment credit and revolving credit, and credit cards are considered revolving credit. To make the most of both, you'll need to understand the terms, including what your monthly payments will be and how they both show up on your credit report.
How does credit work? ›
It's a financial commitment to repay money borrowed plus interest in a timely manner. Failure to repay your credit as agreed can affect your ability to borrow, rent, or even get a job. Lenders use your credit score to determine if it is safe to lend you money.
What are the 4s of credit? ›
Character, capital, capacity, and collateral – purpose isn't tied entirely to any one of the four Cs of credit worthiness.
What are the 4 main sections of credit score? ›
Four Major Sections
Your credit report is divided into four sections: identifying information, account history (or credit his- tory), public records, and inquiries.
What are four examples of credit? ›
There are many different forms of credit. Common examples include car loans, mortgages, personal loans, and lines of credit. Essentially, when the bank or other financial institution makes a loan, it "credits" money to the borrower, who must pay it back at a future date.
