Revolving credit represents open-ended loans that allow you to borrow funds whenever you need them up to a specific limit. The most popular revolving credit vehicles are credit cards and home equity lines of credit (HELOCs).
Living in a state with 10th highest household debt in all of the United States, Utahns are no stranger to the conveniences of revolving lines of credit. Although they are attractive because of their availability, they are prone to misuse.
If you need to finance something, choosing installment credit options like a home equity loan in Utah under the right circumstances is wise. Here are the reasons why you should wean yourself off revolving credit a little bit:
1. It Requires Tremendous Discipline
Considering the culture of consumerism in the USA, it can be challenging to fight the urge to spend tens of thousands of dollars for something you want but not necessarily need. Without discipline, you might bite more than you could chew. Your income needs to keep up with your expenditure, or else you will find yourself in a deep financial hole for nothing.
An installment loan also lets you access a large sum, which could also be flushed down the drain. But at least your credentials have to be scrutinized first before you could borrow the money.
Moreover, installment loans usually can’t be taken out for no good reason. Except for personal loans and home equity loans, these financial products can be used for specific purposes only. That is why you can’t use your auto loan on anything other than a car purchase.
2. It Could Have a Greater Negative Impact on Credit
Revolving credit generally has lax repayment. It gives you the option not to pay the full balance by the due date. Paying the minimum is good enough to avoid getting a credit ding, but it is how debt usually accrues.
The bigger your debt grows, the higher your credit utilization ratio becomes. Credit utilization is the second-most influential factor in the FICO scorecard, so owing over 30% of your limit for a long time could label you as less creditworthy.
Lenders treat installment loans differently. Creditors usually ignore high balances when sizing up consumers, except when calculating the debt-to-income ratio. As long as installment loan payments are settled on time, their size will not drag down credit scores.
3. It Costs Money Even When Unused
Extending revolving credit is a luxury, so it is not free. Whether you use it or not, your creditor will charge you a fee for the privilege. An installment loan can come with variable costs, too. But such fees are applicable when the funds are transferred to you.
4. It Could Come with More Interest
Revolving lines of credit generate interest payments for lenders differently. Credit cards are notorious for compound interest. HELOCs could enforce interest-only payment during the draw period and then more interest during the payment period.
The interest in the installment loan is based on the agreed-upon rate. You will know the real cost of your debt right from the start.
If truth be told, revolving credit should be used as a payment tool only to write a positive credit history. Installment credit, on the other hand, is usually more suitable for financing projects and big-ticket purchases.
Then again, every situation is different. So mull over your financial needs to pick the one that makes more sense to you.