What Is Revolving Credit? Everything You Need to Know

Even though most people use revolving credit on a daily basis, they don’t really know what it actually is. Every time you use a credit card, you are using revolving credit. However, there are various other forms of revolving credit that we use in our routine lives.

So what is revolving credit? How does it work? Does it impact your credit score? Read on to learn everything there is to know about revolving credit so you can better understand and manage your finances. 

What Is Revolving Credit? Everything You Need to Know

Revolving Credit Definition

Revolving credit is defined as a running line of credit that allows you to borrow a pre-set sum of money repeatedly and pay it back in installments. It comes with a certain credit limit that borrowers can repeatedly access while paying back in full or in regular payment intervals.

You can use and pay the credit back repeatedly for as long as the credit account remains open.

Revolving Credit Examples

Some examples of revolving credit include:

• Credit cards: A credit card comes with a credit limit. You can use it to make purchases and then repay the dues monthly, which include the amount you spent, interest, and any applicable fees. If you pay off your credit card balance in full within the due date, no interest will accrue.

• Personal lines of credit: Personal lines of credit are a type of revolving credit account offered by banks and credit unions. It comes with a draw period of up to 5 years during which you can make purchases or withdraw money with a check or a bank card.
  The amount used is paid back in the form of varying monthly payments. As you make the repayments, the credit available is topped up. 

• Home equity lines of credit (HELOCs): A HELOC is very similar to personal lines of credit. However, it uses your home as collateral. With a HELOC account, you can borrow money against your home’s equity. HELOCs have draw periods of up to 10 years and repayment periods of up to 20 years. 

How Does Revolving Credit Work?

A revolving credit account comes with a credit limit. This is the maximum amount of money that you can spend. A revolving credit account is an open-ended account, which means it doesn’t have an end date. 

As you start to use your credit, the available balance will start to decrease. Your credit limit is also affected by the fees and interest costs. 

You can top it up by paying the amount due at the end of each billing cycle. If you can’t pay the amount due, you will at least be required to make a minimum payment to avoid any penalties.

If you choose to pay off the balance in full within the due date, you won’t be charged any interest. 

But if you choose to revolve your credit, only some of the balance will be carried over to the following month. In order to revolve the entire balance, you will need to make a minimum payment.

This minimum payment is either a percentage of your balance or a pre-set amount specified in your agreement.

How Does Revolving Credit Impact Your Credit Score?

Positive Impacts

Revolving credit can impact your credit score positively in various ways. It allows you to improve your credit score by making on-time payments. If you set up autopay on your revolving credit accounts, you can ensure timely payments to boost your credit score.

Revolving credit also helps you diversify your credit portfolio. It is always better to have multiple types of credit accounts to diversify your mix, such as installment and revolving credit accounts.

Additionally, a revolving credit account also allows you to build your credit history. You can open a revolving credit account and make timely monthly payments to build your history. 

Without a credit account, you won’t have a credit score. So there will be no way to show your creditworthiness to lenders.

Negative Impacts

Having a revolving credit account can also negatively impact your credit score in a number of ways. For instance, if you miss your payments, your credit score will take a hit as your payment history majorly determines your credit score.

What’s more, applying for a revolving credit account requires a hard inquiry. A hard inquiry can negatively impact your credit score for up to two years. 

Additionally, your credit utilization ratio also affects your credit score. If you use more than 30% of your credit limit, it can have a negative impact on your credit score. 

For instance, if your credit card has a limit of $5,000, try to keep your spending under 30% ($1,500). Carrying a balance of more than $1,500 can hurt your credit score. So try to keep your credit utilization ratio low.

Lastly, if you decide to close your revolving credit account, it can increase your credit utilization ratio and hurt your credit score. This is because you will have reduced credit available to use if you close your revolving credit account.

Bottom Line

Revolving credit is a type of credit account that allows you to use credit conveniently. By managing revolving credit wisely, you can improve your credit score and even benefit from the various perks that come with these accounts. With a good credit score, you can get ideal credit terms to fund your purchases. 

Now that you know the answer to “what is a revolving line of credit”, go ahead with the application process. Before you apply, make sure to check your credit report.