Revolving Credit: What It Is And How It Can Work For You

Revolving credit accounts allow you to borrow up to a maximum limit, repay it and continue borrowing against it. Unlike installment loans, which have set monthly payments, revolving credit payments will vary based on your interest rate and the amount of debt you owe at any given time.

Understanding this type of loan in more detail is crucial in determining whether it’s right for you and your financial situation.

What Is Revolving Credit?

Revolving credit offers a credit limit, or the maximum amount you can borrow at any time. Lenders or credit card issuers allow you to continuously borrow from the credit limit as long as you keep paying back what you owe. In most cases, you will need to make monthly payments towards your loan — typically a minimum amount due. If there is a balance, the amount you owe is carried over month to month. This amount changes whenever you make payments or borrow more money.

When you make payments, more credit becomes available to you. On the flip side, the more money you borrow, the less credit you have available to you.

Revolving Credit Vs. Installment Credit

Both revolving credit and installment loans require you to apply with a lender, who will make a decision based on factors such as your credit score, credit history, income, etc. If approved, the lender will issue you terms and an interest rate. Unlike revolving credit, which allows you to continuously borrow funds, installment credit has a set amount you receive in one lump sum and is paid off in monthly installments. You will then have a set number of payments to make until the loan will be repaid.

Revolving credit, on the other hand, doesn't have a set number of payments when the loan needs to be repaid (though there are some exceptions). Instead, you can borrow up to a certain amount, pay down the balance, and have access once again to credit up to your limit. The amount of interest you pay will fluctuate since it depends on how much you borrow.

How Does Revolving Credit Work?

Revolving credit involves a maximum amount of money on what you can borrow, also called your credit limit. Whatever amount you pay back becomes available to borrow again.

For example, if you reach your $5,000 credit limit, you cannot borrow any more money. However, if you pay off $1,000, you now have $1,000 available to you to borrow again.

While you can make payments to your revolving credit account whenever you want, there’s still a required minimum payment you must make each month. And, just like most debt, you will need to pay interest on the amount you borrow if you carry a balance month to month. You will not be charged interest on your borrowed credit if you repay your balance in full each month.

Interest rates on revolving credit are typically higher than other forms of credit. The terms and fees will depend on the type of revolving credit and the financial institution.

Types Of Revolving Credit

There are different types of revolving credit accounts, including home equity lines of credit (HELOCS), credit cards and personal lines of credit.

Credit Cards

Credit cards offer a credit limit in which you can use to make purchases — there is usually a different limit for cash advances. You will need to pay the interest rate set by your credit card issuer, unless you pay off the balance off in full each month. Both unsecured and secured credit cards are types of revolving credit.

Personal Lines Of Credit

A personal line of credit is offered by a financial institution, and can even be linked to your bank account. You have a limit in which you can withdraw from on an ongoing basis, and there may not be a grace period for interest charges.

HELOCs

A HELOC is a type of loan that taps into your home equity. Essentially you borrow up to a certain amount of your home equity, which acts as your credit line. You can borrow from this credit line for a certain period of time, called the draw period. As long as you pay down your balance, you can keep borrowing it. After the draw period is over, you will need to start paying back the principal loan amount plus any interest you’ve accrued.

How Revolving Credit Accounts Affect Your Credit Score

Revolving credit accounts can impact your credit score based on how credit bureaus interpret your financial behavior.

Credit Mix

Credit mix looks at how many different types of loans or credit accounts you have. The more of a variety you have, the more lenders see you can handle different types of loans. Having revolving credit can contribute to your credit mix.

Payment History

Payment history is one of the most important factors determining your credit score, as it indicates how and when you pay back loans. Paying back your revolving credit loans on time can have a positive impact on your score, and vice versa.

Credit Utilization Ratio

Credit utilization ratio is the percentage of your total credit limit you’re using from your revolving credit accounts. The higher the percentage, the more it seems to lenders like you need to rely on credit. In turn, your score could be negatively impacted.

Pros And Cons Of Revolving Credit

Revolving credit can be beneficial for those who know how to use it responsibly. However, as with all types of credit, there are some downsides as well.

Revolving Credit Pros And Cons At A Glance

Revolving Line Of Credit FAQs

Learn more about revolving credit by reviewing some of the most frequently asked questions.

Is it good to have revolving credit?

Revolving credit may be a good idea if you’re unsure how much you may need to borrow, or if you don’t need to borrow one large amount for one purchase. Revolving credit gives you the flexibility to cover what you need when you need it. However, it can be easy to run up a balance that you’re unable to pay off in full at the end of the month. Be sure you understand how to responsibly use revolving credit before applying.

How much revolving credit should I have?

The amount of revolving credit you have needs to be enough to meet your financial needs. Having too many accounts could leave you overwhelmed and unable to pay back what you’ve borrowed.

What is a revolving account?

A revolving account is one where you are granted credit up to a certain amount. You can keep borrowing money as long as you pay back what you owe.

The Bottom Line: Used Correctly, Revolving Credit Can Be A Huge Help

By allowing you to continuously borrow money, revolving credit can offer flexibility and faster access to funds when you need them. While revolving credit can help diversify your credit mix and improve your score, it can also hurt your credit score if you’re not careful. Make sure you educate yourself on revolving credit, have a strong financial standing and that your credit score is in good condition before opening a new line of credit. Get the Rocket Money℠ app so you can view your financial information in one place.