Find The Best Insurance
We make it easy to compare and buy insurance.
A credit card is the most common example of revolving credit.
Revolving credit refers to a type of credit that can be accessed repeatedly. If you have an account with revolving credit, it means you can borrow up to a set amount of money again and again. How much you have available to you will increase or decrease based on how much of your balance you repay each month. A credit card is the most common example of revolving credit.
Revolving credit is an alternative to an installment loan, which requires you to borrow a lump sum upfront and repay a fixed amount on a monthly basis. With revolving credit, you have the option to repay over time by paying the monthly minimum, the entire balance, or any amount in between. While a revolving credit account can be a great way to build credit, it can also easily lead to debt if you tend to spend more than you can afford.
In this article:
With revolving credit, you’ll borrow or charge a purchase to your account, subtracting from your overall borrowing amount. That means if you have a $5,000 credit limit and you make a $1,000 purchase, you now only have $4,000 left to spend. Once you pay that back, you’ll have more to borrow again.
How much you have to pay back on a monthly basis depends on your lender and your repayment terms. Unlike a loan, revolving credit accounts don’t have fixed monthly payments.
You can repay the entire balance at once, but you're not required to. If you choose not to, you’ll incur interest based on the fixed or variable interest rate set by the terms of your lending agreement.
Instead, you’ll make a minimum payment, based on your balance, interest rate, and any applicable fees. Unlike a loan, your revolving credit account does not close out when you reach a $0 balance.
Personal or business line of credit. You can open a personal or business line of credit at a financial institution like a bank or credit union. Credit line amounts typically start at a few thousand dollars with interest rates that are usually higher than those of a personal loan, but lower than those of a traditional credit card. Personal and business lines of credit are primarily used to manage cash flow or cover large and unexpected expenses.
Home equity line of credit (HELOC). An alternative to a traditional home equity loan, which is for a specified lump sum, a HELOC lets you draw as much or little as you want from your credit line for a set period of time (usually ten years). The maximum credit line amount is based on the equity of your house and the funds are typically used for home improvement projects.
Credit cards. This is the most common example of revolving credit. Every time you pay off a portion of your card debt, your credit is renewed. This runs counter to a charge card, which requires you to pay off your entire balance every month.
Retail cards. These cards issued by department stores or gas stations work just like credit cards. You can make purchases based on your credit limit and how much of it you pay down.
Don't leave them to pay off your shared balance alone.
Co-signed a loan? If something happens to you, your co-signer will be responsible for your half, too. A life insurance payout can keep their finances on track.
All purchases made on credit can impact your credit score and credit history, which in turn affect everything from refinancing your mortgage, your eligibility to rent a home, and even your insurance rates, including renters, homeowners, and life insurance.
The most widely-used credit scoring model comes from FICO, which evaluates the following:
When it comes to revolving credit, the first two of these factors will most directly affect your credit score. Accounts owed refers to how much of your total credit you are using. Finance experts suggest you don’t use more than 30% of your available credit, across all your credit accounts.
Used correctly, revolving credit can be a great way to build your credit score. Payment history accounts for 35% of a FICO score, so it’s critical to make your repayments on time. Late payments not only result in late fees and penalties but significant drops in your credit score.
Get the latest money news and financial advice from Policygenius experts, delivered right to your inbox.
Was this article helpful?