What are revolving debts?

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Revolving debt refers to liabilities incurred that do not have to be repaid in full each month, although the borrower may be required to repay a percentage of the outstanding balance owed. The outstanding debt owed on a revolving account can fluctuate each month, as payments and purchases are made.

Most revolving accounts will typically have a credit ceiling, limiting the amount a borrower may charge. However, some lenders and creditors do offer credit cards with no stated credit limit for qualified customers.

The most common form of revolving debt is found with the use of traditional credit cards. Depending on the card holder’s spending (and repayment) activities, the balance on the credit card may increase or decrease in any given month.

Comparing revolving debts with installment loans

Revolving debt is in contrast to installment debt. Installment debt occurs when a consumer borrows an installment loan and pays off that debt with regular installment payments until the loan balance and all interest and finance charges are completely paid off. In contrast with revolving debt, the principal balance on installment debts generally has a downward trajectory. Each monthly or periodic payment will gradually pay down the loan balance until it is paid in full.

Revolving debt may be paid off in full at any time or can be paid down with a partial amount of the outstanding debt owed.

  • For example, a credit card has a $5,000 credit limit and a zero balance at issuance.
  • The consumer charges $50 to the card for gasoline. The credit card company will send a statement showing the $50 charge as well as the remaining amount of credit.
  • There is typically a minimum monthly payment on a revolving account. If the minimum monthly payment on the card is $15 the borrower can pay the minimum $15 or pay the $50 off completely (or pay any amount between).
  • If the borrower does not pay off the previous month’s charges completely then interest or fees will accrue, payable to the credit card issuer, in addition to the outstanding balance.

Standard credit card debts are examples of unsecured revolving debts, but there are also secured revolving accounts. Many secured credit cards are designed for those who have yet to establish a credit history or are trying to repair a damaged credit record. A secured revolving account will require a deposit to be held by the credit card company as collateral until a good repayment history can be established. If the borrower fails to make the payments on a secured revolving account the credit company can seize the deposit from the borrower in addition to seeking the outstanding amount owed.

Managing revolving debt

Accruing and managing revolving debt is one of the easiest and most common ways that consumers can use to establish and maintain a good credit history. With responsible repayment and abiding by the terms outlined in the original credit agreement, consumers can buy products and services and pay off those charges over time. Each timely monthly payment can add a positive credit entry to the borrower’s credit record, which can help increase credit scores.

Another variation of the secured revolving debt is the home equity line of credit, often called a HELOC. The HELOC is similar to a standard home equity loan. However, instead of providing the borrower with a loan check, the HELOC provides a checkbook. The borrower can then write checks against the HELOC credit limit, just as using a credit card.

Revolving debts are a fact of life in today’s modern society. However, they do require additional discipline and caution for consumers. Because there is no set mechanism for efficiently paying down the debt balance, it’s up to borrowers to ensure that they are managing their debt levels correctly – and have an effective plan for paying down their revolving debts.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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