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What are the Different Types of Credit?

6 min read

Published December 10, 2024

Table of contents

Key Takeaways

Credit is a process where you borrow money from a creditor and agree to repay it later according to the terms laid out by your lender.
The three main types of credit are revolving, installment, and open credit.
Responsibly managing several types of credit accounts at once can help improve your credit score.

If you’ve bought a new car, purchased a home, or attended college, you’ve probably used a form of credit, even if you’ve never swiped a credit card. Any time you borrow money from an institution and agree to repay it later, you’re using credit.

While lenders offer varying products and services, there are three main types of credit: revolving, installment, and open credit. Understanding how each type of credit works can help you make informed financial decisions and improve your credit mix, which could help raise your credit score.

What is a credit mix?

When you have an open credit account, lenders report your account activity to the three main credit bureaus: Equifax, Experian, and TransUnion. The credit bureaus then organize the information they receive into your credit report. Next, credit scoring agencies use algorithms to translate the information from your credit report into a three-digit credit score. Financial institutions use your credit score to determine your creditworthiness. With a high credit score, you can qualify for more loans and credit cards with the most favorable terms.

Your credit mix refers to the variety of credit accounts you manage. According to the Federal Deposit Insurance Corporation (FDIC), you may see a bump in your credit score if you manage multiple types of credit accounts. A credit card that meets your needs may improve your credit mix.

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What is revolving credit?

With a revolving credit account, you can borrow money whenever you need it—up to a certain amount. Lenders set specific credit limits for revolving accounts. They may use factors like your income and credit score to determine your credit limit. If you hit your account’s limit, you have to repay a portion of your balance before accessing more funds.

Revolving credit offers flexible payment options. At the end of each billing cycle, you can pay any amount up to the total balance you’ve accrued, as long as you pay at least the minimum amount. However, you may be charged interest if you don’t pay the entire balance on the due date.

Examples of revolving credit

Credit cards may be the most well-known form of revolving credit. Revolving credit also includes the following:

Lines of credit: According to the Consumer Financial Protection Bureau (CFPB), a line of credit is a loan with a pre-approved limit that you can access as needed during a set drawing or borrowing period. Banks, lenders, and retailers may provide lines of credit.
Home Equity Line of Credit (HELOC): The Federal Trade Commission (FTC) explains that a HELOC works like other lines of credit, but it requires your home’s equity as collateral. If you miss payments, your lender may foreclose on your home.
Credit cards: Credit cards are the most common example of revolving credit. With a credit card, you could borrow up to a set credit limit. As you repay your balance, you restore your available credit.

Did you know?

Credit cards fall into two main categories: unsecured and secured credit cards. Secured cards require a security deposit, which makes it easier to qualify with low or no credit. In fact, there’s no credit score required to apply for a Discover it^® Secured credit card.¹

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How does revolving credit affect your credit score?

The way you manage your revolving credit accounts could have a substantial effect on your credit score. These accounts impact your payment history, credit utilization ratio, age of accounts, and credit mix. You can improve your credit score by keeping your balances low and making payments on time each month. As your credit limits increase, your credit utilization ratio should decrease, which could also help your score.

What is installment credit?

With installment credit accounts, you borrow a fixed amount of money from a lender, usually for a specific purpose such as school. You and your lender agree to a set of terms, including a repayment schedule.

Typically, you pay the same amount each billing period until the balance has been paid in full. Like revolving credit, installment credit balances accrue interest over time. But unlike revolving credit, after you’ve paid the full balance of the loan, your account is closed.

Examples of installment credit

Secured and unsecured loans are typical examples of installment credit. Many loan products are available to serve different needs:

Auto loans: An auto loan finances the purchase of a vehicle. The vehicle may act as collateral.
Mortgages: Mortgages are designed for purchasing a home or other real estate. Typically, the property itself acts as collateral. Terms may last decades.
Student loans: Student loans generally cover educational expenses like college tuition, room, and board. Repayment usually starts after graduation.
Personal loans: Personal loans are more general-purpose than the other examples. You may use a personal loan to consolidate debt or make a major purchase.

How does installment credit affect your credit score?

When you take out an installment loan, you increase your total debt. Increasing your debt-to-income ratio could potentially hurt your credit score. However, an installment loan can also help you build a positive payment history if you always pay on time.

What is open credit?

Open credit, also called “open-end credit,” functions much like revolving credit but with distinct differences. You can borrow from an open credit account throughout your billing period. However, unlike revolving credit, you don’t typically have a set credit limit. Instead, your spending capacity changes based on your credit usage and payment history. Unlike revolving and installment credit, open credit accounts don’t allow you to carry a balance. At the end of each billing cycle, you must repay the total borrowed amount.

Examples of open credit

Open credit may be more common for business credit accounts than personal ones. It’s possible to get a personal open credit account in the form of charge cards, but the FTC explains that using a charge card means agreeing to repay the card’s balance in full each month.

How does open credit affect your credit score?

Open credit accounts may impact your credit score in a few ways. You can build or maintain a positive payment history by repaying your bill in full each month. Because you can’t typically carry a balance on your open credit accounts, they can also help you maintain a low credit utilization ratio.

A diverse mix of credit shows lenders that you can responsibly manage multiple different types of credit accounts at once. Therefore, using a blend of revolving, installment, and open credit accounts could improve your credit score when used responsibly. In order for your credit to positively impact your credit score, you should keep your credit utilization ratio low and make payments on time each month for all your accounts.

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