Having a solid credit score is important for enabling yourself to be approved for large loans like mortgages. Using a mix of credit types–such as revolving credit and installment loans in Canada–can help you to build up your credit score.
While both revolving credit and installment loans can help you with your credit score, there are some important differences to be aware of.
Here’s what you need to know about Canada’s revolving credit and installment loans.
What is revolving credit?
Revolving credit includes financial products such as credit cards and lines of credit. Rather than borrowing a fixed amount when the account is opened, you can access a maximum amount of money, known as a credit limit. You can borrow as much or as little of this amount as you need for as long as the account is open.
Your revolving credit account has no fixed end date, so the account can remain open indefinitely.
With revolving credit, you can access up to the amount of your credit limit repeatedly so long as you make payments on time and don’t borrow more than your credit limit. For example, if your credit limit is $10,000 and you use $2,000, you have $8,000 available. If you pay off $500, you’ll now have $8,500 available.
Your minimum monthly payment may change depending on how much you spend or pay off each month. This makes it more difficult to budget for your minimum payment.
What is an installment loan?
Unlike revolving credit, an installment loan in Canada has an end date and a fixed amount borrowed. You apply for a set amount of money, say $10,000, and receive that entire amount immediately in a lump sum. Your loan agreement will include the interest charged and a repayment schedule.
Typically, your loan repayment schedule follows your pay cycle. So, if you get paid monthly, you will repay your loan monthly. Because the loan amount and payment schedule are fixed, you’ll pay the exact same amount for the entire life of the loan–although you can pay more than that amount monthly if you wish to pay the loan off more quickly.
With an installment loan, you can’t access the money once it’s been paid off. The lump sum you receive at the start of the loan is the full amount you’ll have access to.
What do revolving credit and installment loans have in common?
Both revolving credit and installment loans give you access to finances when you may not have the cash to pay for a purchase up front. They can also both help you build up your credit, provided you make at least your minimum payments on time.
The bottom line
Revolving credit and installment loans are important tools to help you take control of your finances. They can help you build credit, cover big-ticket purchases, or meet urgent financial needs.
Other articles from mtltimes.ca – totimes.ca – otttimes.ca
