Revolving credit is a type of loan borrowers can repeatedly use to finance purchases and emergencies if needed. Borrowers must repay the amount they used to finance that purchase but they get to reuse that amount again. Hence the term revolving!
But just because you get to spend it, again and again, doesn't mean you get to be careless with your loan and spend it all willy-nilly.
There are fees and interest charges you may have to pay if you misuse your revolving credit account. And that is a recipe for hurting your credit score. |
The goal many borrowers try to achieve with a revolving line of credit is to increase their credit limit so it’s available whenever they need it, especially if an emergency occurs. Questions we often get asked include:
When it comes to being a responsible borrower, the answer to your questions boils down to knowing how and when to use revolving credit properly. All of which you'll be learning about in this article!
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Revolving credit is a type of credit account that’s open-ended, like a credit card that allows you to borrow up to a certain amount and make payments towards whatever amount you owe. Once you’ve repaid what you owe, you can borrow against that loan as often as needed (as long as your account is open)
Think of revolving credit as a spending cycle: You’re allowed to spend the money that you’ve borrowed, repay it and then spend it again. Just don’t go beyond your credit limit because that can put your account at risk of closing.
Credit cards are just one type of revolving credit account. There are a few more including home equity loans (HELOC), and personal lines of credit. Each type of revolving credit has different terms. Make sure you read your loan agreement and have a repayment plan ready so you’re not accruing interest on your account.
Unlike revolving credit, non-revolving doesn't allow you to replenish and reuse the funds again. Once the loan is used, that's it, and the account is closed. Revolving allows you to replenish the account and spend when you've borrowed again.
Some examples of non-revolving credit accounts include:
The cool thing about non-revolving credit accounts is that lenders offer higher loan amounts on those types of loans, and the debt is easier to manage. This means you won't have the urge to spend more on top of what you've already borrowed. Once you used the loan once, that's it. You're just repaying it back.
The kicker with non-revolving credit accounts is once the account is closed and you need another loan, you're applying for another loan and that can impact your credit score.
Having a revolving balance means you’re accruing interest. Yep, just like other loans, you have to pay the price for borrowing from a lender, and that price of revolving credit can vary widely. That's why it's important to pay your balance in full every month to avoid paying interest.
for example…
Let’s say Tiffany opened a credit card account with a $3,000 credit limit. Her interest rate on the credit card is 11.99% APR*. She then goes to the furniture store to buy a $1,800 bedroom set using her new credit card.
If she only makes the minimum payment, it can take her about 60 months to fully repay the $1,800 on top of the interest accrued. Not to mention, that total interest amount could be about $706.85!
In this example Tiffany decided not to repay the entire $1,800 in full, her remaining balance will carry over into the next month and the month after that until it’s paid in full. This is a revolving balance.
Since Tiffany doesn't have to repay the entire loan amount in full, that time gives her some wiggle room to cover other expenses. Yes, she could pay hundreds in interest, but she doesn’t have to cough up that entire loan amount right away which is a benefit. In the meantime, she can enjoy her new bedroom set.
If more money comes her way in the coming days, weeks, or months, Tiffany can pay more money towards her monthly payments, which will reduce the amount of interest that’s accrued.
QUICK TIP: If you have a 0% APR credit card, you can avoid paying interest when you have a balance that's carried into the next month. But 0% APR credit cards are promotional cards, so that 0% APR doesn't last forever. Here's what happens if you have a 0% APR credit card. |
Like with any loan, when you apply the lender reviews your credit history and conducts a hard inquiry which could lower your credit score by a few points. Simply opening a new revolving credit account can increase your score because it adds to your mix of credit - which is what you want. But the key to revolving credit affecting your credit score is mostly about how you use the account.
Your credit score can be positively impacted if you do these two things.
QUICK TIP: Avoid closing revolving credit accounts. If your revolving credit account is still open and in good standing, the length of credit history and available credit play a factor in your score. For example, if you find an old credit card you haven’t used in a while, dust it off and use it for a week to keep it active. |
If you need help understanding your credit score and want to learn more about boosting it, I have some tips for you. Check it out.
If you do the following with your revolving credit account, you'll avoid or minimize the chances of paying fees and interest and boost your credit score.
Here's a complete look at ways you can best use and misuse a credit card.
The best way to stay in control is to continue using your loan responsibly. This means borrowing what you need, paying off your loan balance or paying more than the minimum balance amount. Use the tips above to keep your revolving credit in great shape. The results can boost your credit report and your positive activity will catch your lender's attention where you'll get offers for increasing your line of credit.
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