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.<\/p>\n
But, just like any other borrowing option, it\u2019s important to know how it works and how it can impact you before you use it.<\/p>\n
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\u2019ve used a credit card, then you\u2019ve used revolving credit. Here\u2019s how revolving credit works:<\/p>\n
Lines of credit and credit cards are probably the most common types of revolving credit, but they\u2019re not the only option. Here are some examples of revolving credit:<\/p>\n
Revolving line of credit.<\/strong> A personal line of credit<\/a> 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.<\/p>\n Credit cards.<\/strong> Credit cards<\/a> 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\u2019re charging purchases to an account instead of drawing funds to be deposited into your checking account.<\/p>\n Home equity line of credit (HELOC).<\/strong> A home equity line of credit is a different type of line of credit that uses your home as collateral. Because it\u2019s 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\u2019t repay.<\/p>\n Retail store cards.<\/strong> 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.<\/p>\n The main difference<\/a> 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.<\/p>\n Revolving credit.<\/strong> 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\u2019ll be able to borrow from your available credit again. You don\u2019t need to reapply when you need more funds, as long as you haven\u2019t hit your credit limit there will be funds available to you.<\/p>\n Installment credit.<\/strong> Installment credit accounts include things like personal loans<\/a>, 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\u2019ll 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\u2019ll have to refinance or reapply for more.<\/p>\n Revolving credit can be a useful financial tool, but like any other form of borrowing, it has its advantages and drawbacks.<\/p>\n Flexibility.<\/strong> With revolving credit, you can typically borrow what you need when you need and pay it back over time. You\u2019ll 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.<\/p>\n No need to reapply.<\/strong> When you need additional funds, you don\u2019t need to submit a whole new application. As long as you have available credit and your account is in good standing, you\u2019ll have funds that you can use.<\/p>\n Acts like a safety net.<\/strong> 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.<\/p>\n Builds credit history.<\/strong> If your lender reports to the credit bureaus, your revolving credit could help you build credit history<\/a>. On-time payments and a low credit utilization ratio can have a positive impact on your credit<\/a>.<\/p>\n Higher interest rates.<\/strong> Many forms of revolving credit come with higher interest rates compared to installment credit. If you\u2019re left with an outstanding balance at the end of the billing cycle you\u2019ll be charged interest \u2014 which can add up quickly.<\/p>\n Temptation to overspend.<\/strong> 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<\/a>.<\/p>\n Variable payments.<\/strong> 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.<\/p>\n 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.<\/p>\n Variable income.<\/strong> If your paycheck doesn\u2019t 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.<\/p>\n Emergency expenses.<\/strong> 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<\/a>.<\/p>\n Revolving credit accounts can have a big impact on your credit score. It comes down to how it\u2019s managed. Here are somethings to keep in mind:<\/p>\nRevolving credit vs. installment credit: What\u2019s the difference?<\/h2>\n
What are the pros and cons of revolving credit?<\/h2>\n
Advantages of revolving credit<\/h3>\n
Disadvantages of revolving credit<\/h3>\n
When is revolving credit a good option?<\/h2>\n
How does revolving credit affect your credit score?<\/h2>\n