Revolving credit can be a great financial tool and a convenient way to borrow. It gives you flexible access to funds, helps you manage unexpected expenses when they pop up, and with the right lender, it can help you build your credit history.
But, just like any other borrowing option, it’s important to know how it works and how it can impact you before you use it.
What is revolving credit and how does it work?
Revolving credit is a type of credit that allows you to borrow money up to a set credit limit. Then, as you pay down your balance, the money becomes available to borrow again. If you’ve used a credit card, then you’ve used revolving credit. Here’s how revolving credit works:
- Borrow. If you’re approved, you can use your new revolving credit account. It can be used for a wide variety of personal financial needs, including day-to-day purchases and covering emergency expenses. With revolving credit, you only pay interest on the amount you borrow.
- Repay. When it’s time to repay, you’ll get a statement that includes your balance, minimum payment and due date. You’ll need to pay at least the minimum balance by the due date to avoid late charges and potential damage to your credit score, and paying off the balance in full can help you avoid interest charges. As you repay, your balance will go down and your available credit will increase.
- Borrow again. The main feature of revolving credit is the ability to borrow funds again and again without needing to reapply. This makes it different from installment credit which provides one lump sum upfront. With revolving credit, as long as you have available credit, you’ll have funds you can use. If you’ve maxed out your account, you’ll need to pay down the balance to borrow more.
What are some common types of revolving credit?
Lines of credit and credit cards are probably the most common types of revolving credit, but they’re not the only option. Here are some examples of revolving credit:
Revolving line of credit. A personal line of credit gives you flexible access to funds that you can draw from as needed, and have the money deposited into your bank account to use as cash. It can come in handy, especially in situations where a credit card may not be accepted.
Credit cards. Credit cards are a very common form of revolving credit. While a line of credit and a credit card are similar, the difference is that with a credit card you’re charging purchases to an account instead of drawing funds to be deposited into your checking account.
Home equity line of credit (HELOC). A home equity line of credit is a different type of line of credit that uses your home as collateral. Because it’s secured by your house, the interest rates can be lower than other forms of revolving credit. Many homeowners use them to fund renovations or other big expenses. Keep in mind that you could risk losing your home if you don’t repay.
Retail store cards. Some stores may offer a credit card that you can use when you shop with them. They may come with rewards or discounts, but they often have higher interest rates and lower credit limits than other credit cards and can only be used at their stores.
Revolving credit vs. installment credit: What’s the difference?
The main difference between revolving credit and installment credit is that revolving credit lets you borrow what you need when you need, while installment loans provide you with a one-time, upfront payment.
Revolving credit. After being approved, you can borrow up to your credit limit and repay it over time. As you make your bi-weekly or monthly payments, your balance will go down and you’ll be able to borrow from your available credit again. You don’t need to reapply when you need more funds, as long as you haven’t hit your credit limit there will be funds available to you.
Installment credit. Installment credit accounts include things like personal loans, car loans, student loans and even mortgages. You get an upfront lump sum of money that you can use to take care of personal expenses. You’ll then repay the loan in a series of smaller repayments over a set period. Installment credit can be great for large, one-time expenses, but if you need more money then you’ll have to refinance or reapply for more.
What are the pros and cons of revolving credit?
Revolving credit can be a useful financial tool, but like any other form of borrowing, it has its advantages and drawbacks.
Advantages of revolving credit
Flexibility. With revolving credit, you can typically borrow what you need when you need and pay it back over time. You’ll normally only be charged interest on the amount you borrow. This gives you more control and allows you to take care of expenses as they come up.
No need to reapply. When you need additional funds, you don’t need to submit a whole new application. As long as you have available credit and your account is in good standing, you’ll have funds that you can use.
Acts like a safety net. Revolving credit can act as a financial safety net. If your car breaks down or you receive an unexpected bill, you can use your revolving credit to cover it.
Builds credit history. If your lender reports to the credit bureaus, your revolving credit could help you build credit history. On-time payments and a low credit utilization ratio can have a positive impact on your credit.
Disadvantages of revolving credit
Higher interest rates. Many forms of revolving credit come with higher interest rates compared to installment credit. If you’re left with an outstanding balance at the end of the billing cycle you’ll be charged interest — which can add up quickly.
Temptation to overspend. Because funds are always available, it can be tempting to spend more than you budgeted for. This can make it hard to pay down your balance and lead to debt.
Variable payments. Repayment is typically based on the amount you borrow. This means that your minimum payments could look different from month to month which can make it hard to budget for.
When is revolving credit a good option?
Revolving credit can be a good option if you want flexibility, if your financial needs change month-to-month or if you need to take care of ongoing expenses.
Variable income. If your paycheck doesn’t look the same every month because you work freelance, rely on seasonal work or you earn commission, revolving credit can help you cover expenses during the slower months.
Emergency expenses. If your car needs repair, your refrigerator breaks down or a surprise bill pops up, revolving credit can help you with quick access to funds.
How does revolving credit affect your credit score?
Revolving credit accounts can have a big impact on your credit score. It comes down to how it’s managed. Here are somethings to keep in mind:
Payment history. Payment history is one of the most important factors that goes into calculating your credit score. Making at least the minimum payment on time can help you build good credit history and give your score a boost. Late payments or missed payments on the other hand, can damage your score.
Credit utilization ratio. Your credit utilization rate measures the amount of money you’ve borrowed versus the amount of available credit you have. Keeping your utilization at a reasonable level is typically better and most experts agree you should keep it below 30%.
Credit mix. Credit mix isn’t as impactful as payment history or your utilization ratio, but it does impact your score and appear on your credit report. Having a mix of different types of credit, like installment credit (auto loans and personal loans) and revolving credit (credit cards or lines of credit) can show lenders that you’re able to manage a variety of borrowing options.
Final Thoughts
Revolving credit can give you the flexibility you need when life doesn’t go quite as planned. It can be a powerful financial tool you can use to manage expenses, cover surprises and even build your credit.
When handled wisely, revolving credit isn’t just about having access to funds — it’s about giving yourself options and staying prepared for whatever comes next.
DISCLAIMER: This content is for informational purposes only and should not be considered financial, investment, tax or legal advice.
