Revolving vs. installment credit

Revolving credit is a limit. A credit card, a HELOC or a store line lets the borrower charge up to the limit, pay some or all of it back, and charge again; the balance goes up and down and there is no end date. Interest is charged on the balance carried from one month to the next, and the card's terms set a minimum payment from that balance, so the payment changes as the balance does.

Installment credit is one sum lent once and paid back on a schedule. A car loan, a student loan, a personal loan or a mortgage has an original balance, a term in months and a level payment that clears the balance by the last month. Nothing can be re-borrowed; each payment covers the month's interest and takes the rest off the principal, until the balance is zero.

The two differ in how each month's payment is determined. A revolving minimum is worked from the current balance, so paying down the balance lowers the minimum and a new charge raises it. An installment payment is fixed by the balance, the rate and the term at the start, and stays the same whatever the balance is now.

A credit card carries a $4,000 balance at a 24% APR, 2% a month, and its terms set the minimum at 1% of the balance plus the month's interest. In month 1 the interest is $80 and 1% of the balance is $40, so the minimum is $120. If only the minimum is paid and nothing new is charged, the balance is $3,960 in month 2, the interest is $79.20, and the minimum is $118.80. A $500 charge in between would send the minimum up instead. The formula is this example's; a card's own terms set its minimum.

A car loan for $16,000 at 6% APR over 48 months amortizes at $375.76 a month. Month 1's interest is 0.5% of $16,000, or $80, and $295.76 goes to principal. Month 2's interest is $78.52 on the $15,704.24 left, and $297.24 goes to principal. The payment is $375.76 in month 1, month 2 and month 48; only its split changes.

Card balance, month 1

$4,000

Card minimum, 1% + 2% interest

$120.00

Card balance, month 2

$3,960

Card minimum, month 2

$118.80

Loan balance, month 1

$16,000

Loan payment, months 1 to 48

$375.76

The kind of credit decides whether a payoff date exists on its own. The car loan in the example is paid off in month 48 by its own schedule, whether or not anything extra is paid. The card has no such month: paying the minimum each time keeps shrinking the payment along with the balance, and any new charge moves the balance back up, so the payoff month depends on what is paid and charged from here on.

It also decides what a balance says about the debt. A revolving balance is a snapshot of a line that can be used again, and its available credit is the limit minus that balance. An installment balance is what is left of a sum that was fixed at the start, and each payment brings it one month closer to zero.

Taiga Finance sorts each debt into one of nine kinds by the “Type” chosen in the “Track a debt” drawer: “Credit Card”, “Student Loan”, “Auto Loan”, “Personal Loan”, “HELOC”, “Medical”, “Buy-Now-Pay-Later”, “Family Loan” or “Other”. Credit Card, HELOC and Buy-Now-Pay-Later run as revolving debts; every other kind runs as an installment debt. For an installment kind the drawer's Terms section adds “Original balance ($)”, “Term (months)” and “Origination” under the “Current balance ($)”, “APR (%)” and “Minimum payment ($)” every kind takes; a revolving kind has no term or origination to enter. A mortgage is not a debt kind: it is tracked on Real Estate and shows on the Debt page as a read-only row marked “Mortgage”, whose drawer says that amortization, extra payments and escrow live on Real Estate. The rail's “By type” strip splits the balances by kind.

A card's balance can come from the bank. The drawer's “Linked account” field, under Source, reads “Pull the balance live from a connected account, or keep it on a manual account of its own.” With an account linked, the balance field reads “· pulled live” instead of taking a figure, the debt's drawer is tagged “Live” rather than “Manual”, and its “Balance” row is read-only with a “Synced” mark, so the balance follows the account as charges and payments post. A connected credit card, HELOC or loan account not yet tracked shows on the Debt page as a “Not tracked” row with a “Start tracking” action. In the payoff plan, both kinds accrue a month's interest as the balance times the rate in effect, divided by 12.