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In a nutshell
Revolving credit is a flexible financing tool you can use for many different reasons, whether it’s for personal use or for a business. With revolving credit, you can borrow up to a pre-approved limit and pay it back over time. Credit cards and personal lines of credit are examples of revolving credit.
- You can use your revolving credit up to a preset credit limit.
- You can manage your revolving credit by paying down your balances, which frees up credit for future use.
- Your revolving credit lines can be secured or unsecured.
What is revolving credit?
Revolving credit works like a revolving door. With this type of credit, a lender gives you the maximum amount you can spend. You’ll get a statement showing the total balance you owe each month.
You can pay off any amount, whether it’s a minimum payment (usually around the amount needed to pay off just the interest), all the way up to the entire balance.
Examples of revolving credit
Credit cards and lines of credit, including personal, business and home equity lines of credit, are all examples of revolving credit.
With a credit card, you usually get a one-month grace period to pay off your credit, and many credit cards allow you to make minimum payments towards your loan. But credit cards usually have higher interest rates than other lending products. Lines of credit are slightly different because they may not come with a physical card, and they usually have lower interest rates than credit cards.
How revolving credit works
When a lender approves you for a credit card or line of credit, they’ll give you a credit limit. This is the amount you’re allowed to borrow on your revolving credit account.
When your bill is due, you can pay in part or in full, freeing up that money to be borrowed again. For example, if you have a credit limit of $10,000, you might borrow $1,000 in one month. You’ll have the option to pay a minimum payment, the full $1000 or something in between.
It’s important to know that if you carry a balance from month to month, your lender will charge you interest, and this can increase your balance. Sometimes, lenders will offer increases on your credit limit. This can happen if you request it, or if your account is in good standing.
Compared to a personal loan, the interest rate on revolving credit tends to be higher. This is due to the added flexibility of payment and borrowing compared to traditional loans. Traditional loans also have set payment plans where you pay the same amount each month.
Types of revolving credit
You can get secured and unsecured revolving credit. Secured credit refers to any loan that is backed by an asset, also called collateral. Collateral can be any asset worth a substantial amount, but for most people the asset that secures a line of credit is their home. Lines of credit that use your home as collateral are called home equity lines of credit or HELOCs for short.
Unsecured credit, like a credit card, is not guaranteed by collateral. Your lender relies on trust, credit score and your income to assess if you are an acceptable credit risk.
Sometimes, businesses can use company-owned assets, such as commercial real estate or equipment, to secure revolving credit with a financial institution. If the company defaults on its loans, its lender may foreclose on these assets to help recoup the debt.
Revolving credit vs. installment credit
Compared to installment credit, revolving credit gives borrowers much more flexibility in paying back the loan. With an installment loan, you’ll have a fixed payment and set term to pay off the loan. With revolving credit, you only have to pay the minimum monthly payment and fees.
If paid on time every month, installment loans can help improve your credit score. Revolving credit can both help and harm your credit score, depending on how you use it. Finally, installment loans usually have lower loan rates than revolving credit.
Impact of revolving credit on your credit score
Missing payments and exceeding 30% of your credit limit can hurt your credit score, while consistent use of less than 30% of your credit can help it over time. You can monitor your credit score through sites like myFICO.
myFICO
myFICO
Advantages of revolving credit
The main benefit of revolving credit is its flexibility in both withdrawal and repayment. For example, you might be planning home renovations that will take several months and still don’t know how much you need to spend. Revolving credit can help you borrow money as needed.
Compared with a traditional loan, you can also repay different amounts monthly, as low as the minimum payment to the total amount. With credit cards, you don’t have to pay interest if you consistently pay it in full each month. Some credit cards also come with lucrative rewards.
Disadvantages of revolving credit
The main disadvantage of revolving credit is higher interest rates for the same amount of cash borrowed through a traditional loan.
Some people can also be more irresponsible with revolving credit, which involves more personal responsibility and budgeting when it comes to repayment. With a traditional loan, payments are usually fixed, with no monthly flexibility. However, with revolving credit, the different options can tempt borrowers to pay it off slowly, and they end up paying a lot in interest.
How to stay in control of revolving credit
Unlike installment loans, you can choose the payment amount for your revolving credit, as long as it’s at least the minimum. This added flexibility can be really helpful, letting you pay off the loan when it makes sense for your financial situation. The downside is that this flexibility can trap you in a high-interest payment loop if you don’t pay off your balance quickly.
To stay in control of revolving credit, do a basic repayment calculation to see how much you’d need to pay back monthly to pay off your current balance within a certain period. Also, if you do have to carry a balance, keep it below 30% utilization so you don’t negatively affect your credit score.
The AP Buyline roundup
Revolving credit includes products like credit cards, personal lines of credit and HELOCs. They offer much more flexibility than traditional installment loans, but also higher interest rates.
Revolving credit allows borrowers to access funds up to a specific limit, repay at their pace and reuse the credit as needed. This continuous access can be helpful for business owners and for people managing variable income and covering unexpected expenses.
Keep in mind that the convenience of revolving credit comes with the responsibility of budgeting and staying in control of your balances so you can avoid high interest costs and a negative impact on your credit score.
Frequently asked questions (FAQs)
Do revolving accounts hurt your credit?
There are a few different different ways revolving accounts can hurt your credit:
- Missing payments: As with a traditional loan, missing payments can severely damage your credit score.
- Credit utilization: This is the percentage of your credit limit you use. Using more than 30% of your available credit in a single account or across multiple accounts can hurt your credit score.
- Closing an account: Unfortunately, closing an account can also hurt your credit score, especially if it’s one of your oldest accounts. It also reduces your available total credit limit.
- Hard credit checks: Whenever you apply for credit, the lender will do a hard pull on your credit. This can cause your score to drop a few points, but it usually bounces back in a few months.
AP Buyline’s content is created independently of The Associated Press newsroom. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about our policies and terms here.