What is Revolving Credit?

Revolving credit is a loan with an approved credit limit that you can borrow against and repay repeatedly. It allows the flexibility to use credit to pay for purchases over time instead of paying cash up front. Credit cards are a well-known source of revolving credit, but they aren’t the only type available.

What is Revolving Credit?

Revolving credit allows you to make purchases or withdraw money from your credit line. As you access funds and your available credit decreases, the minimum payment due typically increases. Before using revolving credit, it can be helpful to understand a little more about it:

1. Payments and Interest

With this type of credit, you have the option of making the minimum payment due, paying off the entire balance or paying an amount in between the minimum and the total balance. If you choose to pay off the balance each month within the grace period, you can avoid paying interest.

However, carrying a balance month to month can result in interest charges accruing. Revolving credit often features a variable, rather than a fixed, interest rate, which means the interest rate can increase.

2. Withdrawing Money

Some revolving accounts, such as credit cards, allow you to withdraw cash — also known as a cash advance — from the pre-approved credit line by using your card at an ATM or visiting a bank. Cash advances typically carry a higher interest rate than purchases, and one-time fees may also apply.

Other revolving credit accounts, such as a home equity line of credit, allow you to withdraw cash as needed via a bank-issued checkbook or credit/debit card. Interest charges typically apply but only to the amount you withdraw — not the entire line of credit.

3. Account Balance

A revolving credit account’s balance includes the total amount borrowed. Depending on the type of revolving credit account, the balance may include purchases, annual fees, transaction fees, origination fees, interest, and balance transfers.

Examples of Revolving Credit

Depending on what you need revolving credit for, one type may work better than another. Here’s an explanation of some of the different revolving credit options.

1. Credit Cards

Credit cards are among the most common forms of revolving credit. When you make charges on the card, you can choose between paying the minimum payment due, another amount or the entire balance.

2. Home Equity Line of Credit

A HELOC is a line of credit that allows you to borrow against the equity in your home. Homeowners can borrow up to a set credit limit determined by the lender, and pay back the funds with interest. HELOCs have a draw period, during which homeowners may access funds, and a repayment period, during which no more funds can be accessed, and funds must be repaid.

3. Store Credit Cards

Store cards work much like a regular credit card. However, they can only be used at a particular store or group of stores associated with the card.

4. Bank Accounts With Overdraft Protection

Some banks offer overdraft protection for checking accounts that functions as a line of credit. Upon approval, the bank links the overdraft protection line of credit to your banking account to automatically cover any overdrafts.

You may also be able to access the funds as needed. Each month, the bank will draft the minimum payment due from your linked account. Because this is considered a loan, interest charges apply.

Not all Overdraft Protections function like this, so please check your Bank’s Overdraft Protection product features and payment terms.

5. Personal Line of Credit

With a personal line of credit, a lender pre-approves a borrower for a certain amount. In some cases, funds do not have to be accessed all at once. Instead, they can be accessed over time as needed and paid back in minimum payments.

Payments may be structured to begin right away, or they may feature draw and repayment periods, like a HELOC. Interest is due only on the amount of the credit line used, and an annual fee may apply.

Can Revolving Credit Negatively Impact Your Credit Score?

Revolving credit can negatively impact credit scores — in some instances more than others. Here are some examples:

• When you apply for an account, the credit card issuer typically pulls your credit, which can result in a hard inquiry. A hard inquiry may have a slight negative impact on a credit score.
• Adding a new account to the accounts already listed on a credit report can alter the average age of accounts, which also might negatively impact a score.
• Using too much of a revolving credit line can increase the credit utilization ratio, which many consumer finance experts recommend keeping below 30%. To find out what your credit utilization ratio is, divide your credit card balance by your credit limit. You can calculate the credit utilization ratio for each card and for all cards collectively because both matter.
• Missing revolving credit payments can result in late payments being reported to your credit history.
  
  

Monitoring Your Credit

If you’re not already using a product that helps you monitor your credit, you might want to consider ScoreSense. ScoreSense not only provides users with all three credit reports and credit scores, it also issues daily alerts, as needed, and provides monthly updates regarding your credit. Are you ready to start monitoring your credit? Let us know in the comments.